According to Bill Day, corporate spokesman for Valero Energy Corp., the oil refiner’s 2008 overall production averaged 1.19 million barrels per day of “gasoline and related blend stocks” equaling roughly 18.2 billion gallons a year. The U.S. EPA has declared that this year’s RFS is 11.1 billion gallons, which equals 10.21 percent volume ethanol blend requirement for each of the obligated parties. Assuming Valero’s 2009 gasoline production projections are similar to its 2008 production its share of the 10.21 percent would come to about 1.9 billion gallons of ethanol blending in 2009.
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Valero could purchase renewable identification number (RIN) credits to satisfy its obligation. If the oil refiner were to only purchase RINs to satisfy its RFS obligation and blended zero ethanol into its supplies—an unrealistic scenario but interesting to entertain, nevertheless—figuring a historically high RIN credit price of 15 cents per credit, the oil refiner could pay $285 million in RIN credit accumulations to satisfy its obligation for 2009. Instead, Valero proposes to pay $280 million for capital assets that, year after year, will continue to help it internally meet obligations under the RFS. It is also interesting to note that the five VeraSun plants in question have a cumulative nameplate capacity of 560 MMgy, which could satisfy between a quarter and a third of Valero’s ethanol blending obligations for 2009. The five ethanol plants at $280 million with a 560 MMgy cumulative production capacity could amount to the oil company paying only 50 cents per installed gallon of production capacity.
The RFS, RINs and Ethanol Industry Consolidation
There are some important things to remember about the RFS before getting into RINs, or the government’s mechanism to keep track of how much renewable fuel is being blended into U.S. fuel supplies for domestic consumption to meet the RFS, and the state of U.S. ethanol production. First, the RFS is a floor, not a ceiling—it’s the minimum volume obligated parties must blend into U.S. gasoline supplies. During spells of weak economics, however, that floor may act as a ceiling. Second, there is a distinction between U.S. installed capacity, actual U.S. production and consumption by obligated parties to satisfy the federal mandate.
Installed capacity will always be greater than or, at best, equal to actual production. As far as the RFS is concerned, consumption by obligated parties to satisfy the mandate includes consumption of domestic product produced, plus net imports of ethanol, or the delta between exports and imports, plus the change in ethanol stocks at the end of a given period. According to data gathered by BBI International’s Staff Writer and Plant List Manager Bryan Sims, 32 U.S. ethanol plants representing 2.02 billion gallons of annual production capacity are currently idled. This phenomenon, coupled with poor ethanol blend margins—meaning the price of ethanol and the price of gasoline are so close that any economical benefit blenders would see by blending the cheaper ethanol have been minimized—along with the 2008 year-end reporting deadline approaching quickly on Feb. 28, 2009, have together caused RIN prices to skyrocket.
Totals from January 2008 to October 2008 Figures in millions of gallons
SOURCE: ENERGY INFORMATION ADMINISTRATION
“The price of RINs is going up because it’s more favorable to the obligated parties to place RINs in order to satisfy their obligations directly as opposed to the RINs they would get through blending,” says Clayton McMartin, president of Clean Fuels Clearinghouse and the renewable fuels registry, RINSTAR. In late January, RIN prices hit 16 cents per credit, up from just a couple of cents at the beginning of the year. “There are some people who are coming to the game late, and are just now starting to understand what their obligations are under the regulations,” McMartin continues. “Consequently, they’re out there scrambling trying to find RINs, but there is less ethanol being put into the marketplace right now so, as a result, the RINs that are out there are fetching a higher price.” Some of the latecomers buying up RINs in January and February 2009 are doing so to apply them to their 2008 obligations. But obligated parties can also carry a deficit forward for one year without penalty. With 32 ethanol plants idled, and some that are producing under capacity, stocks or inventories are lower. Until inventories are back up, McMartin doesn’t see RIN prices dropping.
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