By Bradley Olson
Environmental regulations designed to boost the amount of
ethanol blended into the U.S. gasoline supply have inadvertently
become a multibillion-dollar windfall for some of the world's
biggest oil companies.
Companies including Chevron Corp., Royal Dutch Shell PLC, and BP
PLC could reap a total of more than $1 billion this year by selling
the renewable fuel credits associated with the ethanol program,
according to an analysis commissioned by CVR Energy, a refinery
operator controlled by billionaire Carl Icahn, a vocal critic of
the rules.
For other companies, especially smaller refiners, the rules have
had the opposite effect, forcing them to spend hundreds of millions
to buy credits to comply.
Some large oil companies acknowledge they are reaping revenue
from the regulations, but say their advantage stems from large
investments they made to comply with it, and stress that not all of
the money translates into profit.
"Because a few other companies made different business decisions
and are now living with the consequences is not a reason to
suddenly change the rules," said Geoff Morrell, a senior vice
president for BP.
Spokesmen for Chevron and Shell said they couldn't immediately
comment. A spokesman for Citgo, the U.S. arm of state-owned
Petróleos de Venezuela SA, disputed it was profiting from the
credits as the analysis claims, saying that it buys more than it
sells annually to comply with its obligations.
The ethanol and biodiesel program, created during President
George W. Bush's administration, was aimed in part at reducing U.S.
dependence on foreign oil. But those concerns have waned as a
result of the abundant new U.S. oil and gas supplies unlocked by
shale drilling. The rules require refiners to either blend ethanol
with the gasoline they produce or buy credits.
Valero Energy Corp. disclosed when it reported third-quarter
earnings Tuesday that it incurred $198 million in costs to meet
biofuel blending rules during the period. It has said it will have
to shell out as much as $850 million this year for the credits. PBF
Energy Inc. has estimated costs will reach $300 million.
The top 10 U.S. refiners spent $1.1 billion on biofuel credits
in the first half of this year, according to Moody's Investors
Service. Some refiners have warned they could be forced to conduct
mass layoffs, or file for bankuptcy, because of the soaring costs
of compliance.
"The consumer is paying more and it's ending up in the pockets
of retailers, major oil companies or speculators," said George
Damiris, the chief executive of HollyFrontier Corp., a Midwestern
refiner. "Over time, if this goes uncorrected, people will
basically be put out of business."
The price of the credits has skyrocketed this year, amid
complaints from fuel suppliers that they are being forced by the
Environmental Protection Agency to blend more ethanol than
consumers or car makers are willing to accept.
The EPA has raised the required ethanol amount to 10.5% of total
fuel as required by legislation. But auto makers argue that
anything above 10% is potentially damaging to some engines, and
consumers have been slow to embrace the more ethanol-heavy
blends.
Another area of dispute is the step in the fuel supply chain at
which the credits are created. It takes place at the point where
ethanol and gasoline are blended. That favors companies that
control vast networks of gasoline stations and thus reap more
credits than the amount of oil they actually refine into fuel,
while disadvantaging smaller refiners without as much of a retail
presence.
Shell, which controls gasoline stations in the U.S. that sell
about 1.6 million barrels of fuel a day, appears to be one of the
biggest beneficiaries of the program, according to the CVR
analysis, conducted by refining consultant Baker & O'Brien Inc.
The retail stations it controls exceed its U.S. refining capacity
by about 1 million barrels a day, according to the study.
The cost of ethanol credits this year has ranged between $3 and
$4 a barrel, according to refining analysts. That suggests Shell is
structured to rake in as much as $1.5 billion annually from selling
the credits.
Citgo's potential haul, according to the analysis, exceeds $900
million. BP and Chevron have the ability to sell between $200
million and $300 million in credits annually.
Valero, which spun off its retail stations in 2013, CVR and
other refiners have suggested changing who is obligated to account
for blending, making it retailers and wholesalers instead of
refiners.
But the dispute over how to fix the program has created a rift
in the oil industry, pitting some of the world's biggest oil
companies against smaller refiners. BP and the American Petroleum
Institute have opposed the change, saying it could introduce
significant uncertainty and do little to create incentives to blend
ethanol. Exxon Mobil Corp. has argued the best solution would be
repealing the entire program.
EPA officials say they are reviewing the refiners' proposal.
Alison Sider contributed to this article.
Write to Bradley Olson at Bradley.Olson@wsj.com
(END) Dow Jones Newswires
October 27, 2016 06:44 ET (10:44 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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