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Oil Refiners' Ethanol Credits Anger Others -- WSJ

1 Jun 2018 6:34 am
By Timothy Puko and Christopher M. Matthews 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (June 1, 2018).

The Trump administration is giving two oil refiners tens of millions of dollars' worth of retroactive biofuels credits, unprecedented help for refining operations that is refueling a fierce conflict between energy companies and corn growers.

The decision hands the equivalent of more than $30 million to HollyFrontier Corp. and Sinclair Oil, after a federal court's 2017 ruling that the Obama administration had improperly denied requests the companies had made for economic hardship help in 2015.

Shares in HollyFrontier and other refiners spiked briefly after the news. Refiners' shares have doubled, and in some cases tripled, in the past year as the Environmental Protection Agency has handed out a slew of similar waivers from obligations under federal law to blend biofuels into their products. The waivers were designed for small refineries facing economic troubles but some have been awarded to businesses owned by some of the biggest and most successful U.S. companies.

The most recent credits, awarded months ago and first reported Thursday by Reuters, are the first publicly known retroactive waivers. They mark the latest twist in a conflict that has brewed for years and peaked with about a half-dozen White House meetings since Mr. Trump became president.

Experts view the credit decision as a sign that the conflict is no closer to resolution, and critics say it undermines a last-ditch effort at a compromise at the most-recent White House meeting.

Tensions between the two industries have been building since well before Mr. Trump became president, the result of a 2005 law that requires refineries to blend about 10% plant-based ethanol into the fuel they produce, or buy credits from rivals to cover their blending obligations. Congress created the mandate hoping to reduce carbon emissions and wean the U.S. from foreign crude at a time when oil prices had begun to soar.

Small refineries with less than 75,000 barrels a day of capacity -- even if owned by a large company -- can get a waiver from the ethanol requirement if they prove the mandates are causing "disproportionate economic hardship," according to the EPA website. For years, the EPA regularly rejected requests from refiners seeking waivers, but courts have ruled in recent years that many of those decisions were unfair.

This year, the EPA rejected just one of some 30 applicants through late April, encouraging more refiners to consider applying for the first time. It has received applications from oil giants Exxon Mobil Corp. and Chevron Corp.

Some refiners have asked about waivers that would allow them to recoup costs from years past, according to a person familiar with the matter. The agency doesn't intend to entertain such requests, but is also bracing for court challenges to that decision, according to a senior administration official.

Opponents among corn growers and biofuels advocates criticized the EPA's action, calling it evidence that EPA chief Scott Pruitt is backtracking on commitments to uphold federal mandates for how much ethanol is blended into gasoline.

EPA officials and industry lawyers said the award was a narrow response to a court ruling.

Renewable Fuels Association and the National Corn Growers Association, among others opponents, filed suit Wednesday against the EPA for other waivers it has granted, including two to operations owned by HollyFrontier. Other suits may follow, industry experts say.

Three weeks ago, both corn growers and refiners touted a deal offered during the last White House meeting that was largely based around expanding ethanol use during summers, credits for exported ethanol and adjustments to the waiver program, according to people briefed on the arrangement.

But each side interpreted the deal outlines differently, some aspects would take months of new rule-making and White House officials have hesitated to release a statement they had drafted to clarify the terms, according to one of the people.

The Trump administration has struggled for months to find compromise options that would hold up in court and get support from both sides. The decision could make those negotiations tougher, by reinforcing a perception among biofuels advocates that the EPA always works against them, said Benjamin Salisbury, policy analyst at B. Riley FBR Inc.

"It's not a break," he added. "But the seeds of distrust are there, and it's still going to be hard to find a win-win solution, if it exists."

The EPA granted HollyFrontier about $34 million in usable credits earlier this year related to biofuel blending obligations -- labeled in the industry as renewable volume obligations, or RVOs -- at one of its Wyoming refineries stretching back to 2015.

"In the first quarter of 2018, we increased our inventory of RINs" -- renewable identification numbers, as the biofuel credits are known -- "and reduced our cost of products sold by $33.8 million representing the fair value of the 2018 RINs generated because of the Cheyenne Refinery's exemption of its 2015 RVO," HollyFrontier said in a regulatory filing.

A HollyFrontier spokesman didn't immediately respond to a request for comment.

An EPA spokesman called the actions "narrow in scope" and consistent with legal rulings.

"The Agency has been revisiting some prior denials in light of a recent court opinion holding that EPA had been applying the hardship exemption for small refineries too narrowly," the spokesman said in a statement. "Last summer, the Tenth Circuit found that EPA cannot make an exemption conditional on a refinery showing that its continued survival was at risk."

Corn growers say the EPA's actions have left them at a disadvantage.

"Administrator Pruitt needs to understand that his actions to continue to grant waivers, now retroactively, to oil refineries is undermining the Renewable Fuel Standard -- a program that Administrator Pruitt told Congress he was committed to upholding," Iowa Republican Sen. Joni Ernst said in a statement. "From granting waivers to oil refineries left and right to dragging his feet on fulfilling the President's promise to farmers on E15, Administrator Pruitt is undermining the RFS," or renewable fuel standard.

Lawyers who work with refiners said Mr. Pruitt is following the law and upholding the mandate. "Hardship waivers are necessary because the rule causes harm to small refineries and is badly in need of reform," said LeAnn Johnson Koch, an attorney at Perkins Coie who works with merchant and small refineries. "Granting exemptions is not the fix. It's a Band-Aid."

The EPA also gave Sinclair Oil similar credits for obligations in years past, said a person familiar with the matter, but the value of those credits is unclear. Sinclair Oil is privately held and isn't required to disclose such details. Susan Schoolfield, a spokeswoman for the company, declined to comment.

Write to Timothy Puko at tim.puko@wsj.com and Christopher M. Matthews at christopher.matthews@wsj.com

(END) Dow Jones Newswires

June 01, 2018 02:34 ET (06:34 GMT)

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