April 13, 2016
How much is the RIN Bank Overstated?
Since its inception in 2007, most of the industry, me included, has made a calculation to determine the amount of RINs that have been deposited in the RIN bank for use at some later date. The calculation was pretty straightforward. The blended amount of renewable fuels was compared to the Renewable Fuel Standard required for any given year and the difference was either credited or debited to the RIN Bank. The blended amount of renewable fuels could be calculated from production data, imports, exports and changes in inventory and whatever other adjustment was deemed necessary.
Unfortunately, this calculation is not correct. The problem is in understanding the arithmetic the EPA uses to determine the Renewable Fuel Standard issued to obligated parties and how this standard is implemented in the real world. One might be inclined to think this is impossible since the EPA must follow the Renewable Fuel Standard, which indeed they do (although some might argue with this statement). So where are the discrepancy, or plural, discrepancies?
The first problem is to look at the EPA calculation. The Renewable Fuel Standard dictates volumes, i.e. gallons of renewable fuels in four categories. The Renewable Fuels Standard directs the EPA to obtain volumes, i.e. gallonsof gasoline and diesel demand estimates from the EIA. The gasoline and diesel demand estimates are reduced by the amount of renewable fuels contained in these sales. They are further reduced by Alaska demand. The diesel demand is further reduced by diesel consumed in ocean going vessels. There are then some very small modifications that are made for small refiner exemptions. The pure gasoline and diesel hydrocarbonvolumes are added together to get a total.
At this point the EPA takes the volume of renewable fuels for each category and divides it by the pure gasoline and diesel hydrocarbon total and calculates a percentage. The EPA hands those percentages to obligated parties
Now along the way the EPA has used estimated gasoline and diesel demand volumes. What happens if the actual demand is higher than the estimated demand? Since the percentages don’t change, it means that the amount of RINsrequired will increase.
Let’s look at a very simple example. The totally fictitious AXL Oil Company is an obligated party. The EPA estimated that the USA hydrocarbon only demand after all adjustments were made was going to be 170.02 billion gallons in 2013. Based on a RFS Standard of 16.55 billion gallons of renewable fuels for 2013, the EPA told the AXL Oil Company that its RFS obligation was 9.74% (16.55 divided by 170.02).
The AXL Oil Company had a very good year in 2013. Demand was up. In fact, total gasoline and diesel pure hydrocarbon sales for 2013 were 173.25 billion gallons. The AXL Oil Company then had to come up with RINs. The amount that AXL required just for compliance purposes was 9.74% of 173.25 billion gallons or 16.88 billion RINs. !!!
The amount of RINs that the AXL Oil Company needed just for compliance exceeded the RFS mandate by 330 million gallons. In the old way of thinking, had the AXL Oil Company actually blended all 16.88 billion gallons of RINs, the industry would see this on the various EIA Reports and in the EPA EMTS system and concluded the RIN Bank grew by 330 million gallons when in fact the RIN bank would have grown by ZERO. Every RIN that the AXL Oil Company used was needed for compliance. None of them could be banked.
The converse is also true. Suppose that the AXL Oil Company had a devastating year in 2015. The country went into a depression and there was no demand for gasoline and diesel. Not a single gallon of gasoline or diesel fuel was produced. The AXL Oil Company did not produce anything and therefore its RFS obligation was zero. 9.74% of zero is still zero. The EPA based its calculation on 16.55 BG of RINs. If one looked at the EMTS in this hypothetical case, it would show zero RINs leading one to conclude that the industry was short 16.55 BG. In fact there is no shortage because in this case the required number of RINS (namely zero) was far less than what was in the original standard.
Conclusion Number 1: If the actualvolume demand of hydrocarbons is greater than the estimatedvolume demand used by the EPA to calculate percentages, then the RIN bank will be overstated using the original calculation method. The converse is also true. If the actualvolume demand of hydrocarbons is less than the estimatedvolume demand used by the EPA to calculate percentages, then the RIN bank will be understated using the original calculation method.
The second problem is to determine the actual amount of diesel fuel consumed in the transportation sector and more specifically how to handle (from a RIN balance standpoint) ultra low sulfur diesel that is being consumed on ocean going vessels. In the foregoing example I have made some assumptions regarding diesel volumes, but the following discussion is to illustrate the issues.
The EIA issues a Petroleum Supply Monthly that classifies distillate into three categories: 15 ppm and less, 15 to 500 ppm and then 500 ppm and greater. That report does not distinguish between transportation diesel, diesel used at utilities or distillate used for heating oil. It’s a sulfur only categorization.
Against this backdrop, New York State adopted Ultra Low Sulfur Heating Oil in July 2012, Philadelphia went in 2015 and New Jersey and Maryland are going in July 2016 making the EIA Product Supplied Numbers difficult to use.
On the other hand, the EIA issues a Prime Supplier Sales Volume report that distinguishes between heating oil and diesel. Diesel is also categorized by sulfur. However in 2013, some LSD was still being used in transportation fuel. Unfortunately this report does not identify every diesel sale nor does it identify diesel consumed in ocean going vessels. Fortuitously the EPA does identify the amount of ULSD used in ocean going vessels from a letter that they receive from the EIA. The numbers were zero in 2013, 9 million barrels in 2014, 47 million barrels in 2015 and 50 million barrels in 2016.
Conclusion Number 2: It is difficult to determine that actual amount of transportation diesel that has a RIN obligation attached to it. For 2013 I used the Prime Supplier Sales Volumes for ULSD plus LSD. No ULSD was used for ocean going marine vessels. One could have taken the Product Supplied Volume for 15 ppm sulfur distillate subtracted out New York State heating oil demand from the Prime Supplier Volume report and then added back in the Prime Supplier Diesel LSD volume and come up with similar transportation diesel figures. It just ain’t perfect.
Since the EPA knew the answers for gasoline and diesel demand and biofuels blending in 2014 before they issued the 2014 Renewable Fuel Obligations, the impact seems to be around 25 million RINs
The third problem surfaces in a material way in 2015. As previously mentioned, the EPA uses the volume of diesel demand from EIA estimates. Part of those volumes include ultra low sulfur diesel consumed by ocean going vessels. This volume is exempt from the Renewable Fuel Standard. The problem is that the majority of refiners and importers of ULSD are not segregating nor tracking the ULSD that ultimately ends up consumed in an ocean going vessel.
How does one claim an exemption on a particular gallon of ULSD sold by a bunker operator if one does not know the original point of manufacture? This is the same issue faced by gasoline exporters. Certified gasoline leaves the refinery at which point a RIN obligation is incurred. If that volume travels through the Colonial Pipeline system as part of a fungible batch and is then exported out of New York Harbor, there is no way for the refiner to undo his obligation. The same analogy applies to ULSD going through the logistics and distribution system and into a vessel for bunkers. The refinery is producing ULSD and incurring a RIN obligation. It may not be going through bonded storage, it may not be tracked, and as a result, the fuel cannot be exempted from the Renewable Fuel Standard.
Conclusion Number 3: Refiners will buy RINs for sales of ULSD into the ocean going vessel bunker market that would otherwise be exempt simply because it does not have the paperwork nor ability to track the volumes. This means that actual ULSD demand will be higher than the EIA/EPA estimates. See Conclusion Number 1.
The fourth problem is that the outlook does not get better for 2015 and 2016. The EPA has issued its standards for both years again using EIA estimated gasoline and diesel volumes.The problem is easy to see when simply comparing total demand figures which exclude offsets for contained renewable fuels, Alaska volumes or ocean going vessel sales.
Actual gasoline demand in 2015 was 140.44 billion gallons; the EIA estimate was 139.38 billion gallons. Actual is higher than estimated implying increased RIN buying just for compliance. According to the Prime Supplier Sales Volumes report, ULSD demand in 2015 was 55.96 billion gallons compared to the EIA estimate of 54.05 billion gallons. To be fair, the prime supplier sales volumes does include the 47 million barrels or 2 billion gallons of ULSD sales to the vessel bunker market, but I believe that the industry will be covering most of these sales with RINs. So for 2015, actual gasoline and diesel demand is about 3 billion gallons higher than estimate, and at an RFS obligation of 9.52% that equates to an additional 250 million RINs. (If the industry only has to cover 50% of the ocean going vessel sales, the number drops to 160 million RINs)
For 2016, the EIA estimates gasoline demand at 139.96 billion gallons a paltry 0.4% increase versus their 2015 estimate. The industry expects that 2016 gasoline demand will be up at least 1.5% from 2015 setting an all time record of at least 142.50 billion gallons, some 2.5 billion gallons higher than the EIA estimate. The EIA is estimating total diesel demand in 2016 at 55.26 billion gallons. If actual demand is flat to 2015, 2016 demand would be 55.96 billion gallons, or 700 million gallons higher than the EIA estimate. In total for 2016, actual gasoline and diesel demand is about 3.2 billion gallons higher than the EIAestimate, and at an RFS obligation of 10.10% that equates to an additional 325 million RINs. (If the industry only has to cover 50% of the ocean going vessel sales, the number drops to 225 million RINs)
Conclusion Number 4: In three of the last four years, the EIA demand estimates are lower than actual demand figures. If I am correct and the industry buys RINs for the majority of sales for ULSD into the ocean going vessel market, by the end of 2016 the RIN bank will have about 900 million RINs less than one might have thought because the volume of RINsrequired to simply meet the RFS obligation is higher than the Renewable Fuel Standard volumes resulting in a faster depletion at the bank. If the industry only covers 50% of the ocean going vessel sales, the number drops to about 740 million RINs. If the industry does not have to by a single RIN for ocean going vessel sales, the number drops again to about 550 million RINs.
Warning, Warning, Warning: I have a big assumption in saying that the majority of ULSD going to the ocean going vessel bunker market has RINs attached due to the logistics and distribution system. Although I have done some industry surveying, it is by no means exhaustive or complete.
By the end of 2016, the RIN bank will appear to be overstated between 550 and 900 milliongallons for the 2013 through 2016 period. I have not looked at the EIA estimates versus actual were for 2007 through 2012. It may make the situation better, worse or indifferent. If one has confidence in the RIN carryover figures from 2012 into 2013, then the conclusion is that the industryis worse off than it thinks. Rather than running out of RINs in 2018, it is possible that it happens in 2017.
A more rigorous calculation for2015 is attached.
Disclaimer: Lipow Oil Associates does not assume any liability and/or responsibility for the written information, accuracy or content of this report or any loss(es) caused by the use of the report or information contained herein.Copyright 2016.
RINs Calculation for 2015
The Federal Register contains the gasoline and diesel demand figures as well as the amount of contained biodiesel
Page 77511.
The 2015 Starting point for demand is as follows:
Demand BGRenewable Fuel ContentNet Hydrocarbon
Gasoline139.3813.81125.57
Diesel54.051.7652.59
Total177.86
Using these hydrocarbon figures in conjunction with the RFS biofuels standards, the EPA calculates percentages for each category that obligated parties must meet:
Page 77512.
The 2015 Percentage Standards are:
Renewable Fuel16.93BG9.52%
Advanced2.88BG1.62%
Biodiesel1.49% (1.73 actual gallons)
Conventional14.05BG7.90%
It is the percentages that are applied to every gallon of gasoline and transportation diesel. That begs the question, how many RINs are required to meet the actual amount of gasoline and diesel that obligated parties are dealing with:
The 2015 Actual figures are as follows:
Demand BGRenewable Fuel ContentNet Hydrocarbon
Gasoline140.43-0.2513.68126.50
Diesel55.96-.152.053.81
Total180.56
Where did these numbers come from and what assumptions have been made?
The Gasoline demand of 140 43 BG and the amount of fuel ethanol blended of 13.68 BG came from the Petroleum Supply Monthly issued February 2016 which contained the data for all of 2015. The Prime Supplier Sales volume shows 250 MMG for Alaska demand which is subtracted. The net gasoline hydrocarbon figure was 126.50 BG.
The Diesel is much trickier. The Petroleum Supply Monthly contains distillate by sulfur content. That means that the 15 ppm sulfur category contains not only road diesel, but ultra low sulfur heating oil for New York State.
The Prime Supplier sales volume identifies diesel use by sulfur category, but it also has figures for LSD and HSD.
The prime supplier sales volume does not break out ULSD for marine vessels but the EPA says that 47 MMB of it was used in ocean going vessels.
I am using the prime supplier sales volume for ULSD only. I averaged the 12 months and multiplied by 365. That equaled 55.96 BG. Not exact, but expedient. I subtracted 150 MMG for Alaska diesel demand. I did not subtract the volume of ULSD that went to ocean going vessels which is 47 MMB or 2.0 BG. So my assumption that the majority of this 47 MMB carries RINs with it is a very big deal. If only 50% of the volume had RINs, that’s about 95 million RINs
That addresses the total diesel demand. How much renewable fuel went intodiesel? The EPA EMTS can tell us how many biodiesel and renewable diesel gallons and RINs were generated.
Unfortunately it cannot tell us how much went into heating oil. If I assume it all went into diesel fuel, then I am underestimating the amount of pure hydrocarbon diesel was sold. But I have no clear option at this time. Now the EMTS says that the total gallons of biodiesel and renewable diesel were 2.1 BG. The EIA says that 6 MBD or 90 MMG was exported.
I will assume at some point these 90 MMG are retired. That leaves 2.0 BG of renewable fuels in diesel.
The amount of pure hydrocarbon diesel is then 55.96 minus 0.15 minus 2.0 or 53.81 BG.
The EPA originally expected 177.86 BG of hydrocarbon to require 16.93 BG of RINs.
The actual volume of hydrocarbon of 180.56 BG requires 9.52% or 17.19 BG of RINs.
In the old method of calculation, if the industry blended 16.93 BG of the correct RIN categories, we would have said the RIN bank stayed even. However, the industry requires 17.19 BG just to meet its obligation, so the RIN bank will have 260 MMG less than thought.
1