Oil companies break with trade group on renewable fuel mandate

The oil and gas industry’s top trade groups doggedly insist that Congress must completely scrap a federal mandate that forces gasoline makers to blend in ethanol and other renewable fuels.

But not all oil companies are on board.

At least two major integrated oil companies — Shell and BP — are pushing more modest changes to the eight-year-old renewable fuel standard, while others have biofuels investments that would be undermined if the mandate was dismantled.

“Shell generally supports the RFS, but we do feel that it has to be revised,” said John Reese, the company’s downstream policy and advocacy manager, during an event Thursday that was organized by The Hill newspaper.

As the world’s largest distributor of biofuels, Shell recently partnered with Virent Inc., to produce advanced alternatives made with plant materials at a pilot facility in Houston.

“It’s because of those interests we have a little bit of a different interest than some others in the oil industry,” Reese said.

BP, meanwhile, is one half of Butamax Advanced Biofuels, a joint venture with DuPont that aims to convert corn, wheat and other biomass into an alcohol that has a higher energy density than traditional ethanol and can be blended into gasoline at refineries. Butamax’s chief executive praised the renewable fuel standard in a June interview with Bloomberg.

For its part, BP says changes are needed to the RFS, but the company hasn’t visibly been part of an effort to repeal the standard.

“BP supports the goals of the RFS program to stimulate the development and deployment of biofuels technologies,” said spokesman Matt Hartwig. “There are challenges with the standard that must be addressed, and we continue to work with regulatory authorities to address these issues.”

The renewable fuel standard obligates refiners to add steadily increasing amounts of ethanol and other alternatives into the nation’s transportation fuel supply — up to 36 billion gallons in 2022. But oil industry leaders say they are hitting a “blend wall” where they can no longer mix in enough ethanol to meet the renewable fuel mandate’s volumetric targets without exceeding a 10 percent threshold acceptable for use in all cars and trucks.

The American Petroleum Institute and the American Fuel and Petrochemical Manufacturers group insist that nothing short of a full repeal will do.

“Unless we put an immediate end to this outdated, detrimental policy, the mandate could put consumers in harm’s way and disrupt the nation’s fuel supply,” said API President Jack Gerard.

Separately, AFPM President Charles Drevna refers to “eight years of demonstrated failures in implementing an unworkable RFS.”

And ExxonMobil’s vice president of public and government affairs, Ken Cohen, wrote Thursday that the RFS is “broken beyond repair.”

Despite the disagreement among some oil companies about the fate of the RFS, industry representatives stress that there is unity that the requirement is imperfect.

“While some members may have slightly differing views, there is unanimous recognition that the RFS is flawed,” said API spokesman Carlton Carroll.

Even companies who mildly support the RFS are unlikely to champion the law, suggested Scott Segal, a lobbyist with Bracewell and Giuliani who represents refiners.

“Even if a refiner had a slight surplus of RINs, they still would not go to the mat for the underlying renewable fuel standard,” Segal said. “As a policy, the RFS is simply too risky, expensive and inconsistent with general principles contrary to government interference in the marketplace.”

“There are better ways to encourage alternative fuels going forward,” he added.

The hardest hit players in the oil industry may be so-called merchant refiners that sell their petroleum products into the wholesale market without owning blending infrastructure and mixing in the biofuels themselves.

For instance, San Antonio-based Valero Energy Corp. is squeezed because while it is the nation’s third-largest ethanol producer, the renewable fuel law blocks the company from holding on to the biofuel credits that are created with each gallon of the product. Instead those tradable biofuel credits, known as RINs, travel with each gallon of ethanol to blenders. Because Valero isn’t blending the majority if its own product, it can’t take advantage of those credits, even though the renewable fuel law puts the onus on refiners to comply by securing RINs. As a result, Valero is forced to buy the credits in a market where RIN prices have climbed to over $1 per gallon, up from $0.05 a year ago.

Valero CEO Bill Klesse told a Senate committee on Tuesday that the renewable fuel standard “is out of control.”

“We should repeal the RFS and start over,” he said.

Biofuels backers say that would undermine investments in nascent technology for producing a new generation of alternative fuels produced from non-edible plant materials, just as new factories are coming online. Oil company investments are included in the mix.

For KiOR Fuels, a biofuel producer in a deal with Chevron Corp., stable policy is essential, said senior vice president John Kasbaum. “What’s important is let’s not change the rules in the middle of the game,” Kasbaum said at The Hill event.

“Changing the rules at this point would unwind all that’s been created and all that’s potentially in front of us,” added Wayne Simmons, CEO of Sundrop Fuels.

And White House energy and climate adviser Heather Zichal said calls to repeal the RFS “are nothing but shortsighted.”

Although the oil industry may be divided on whether the renewable fuel standard is salvageable, they are unified in seeking changes. In the short term, they are appealing to the Environmental Protection Agency to lower the total ethanol requirement so that it is below 10 percent and perhaps waive other biofuel obligations altogether for a year.

But Shell’s Reese noted that annual waivers are not a permanent fix — and create the same kind of instability that biofuels supporters are worried about. “Having an annual debate about whether this program is creating significant economic harm does not create a stable economic environment for investments in biofuel,” he said.

The House Energy and Commerce Committee is set to convene two days of hearings on the renewable fuel standard next week ahead of a broad bid to reshape the law. The panel has so far been deliberative in its approach to the RFS; the committee issued a series of five white papers on the mandate and asked stakeholders to weigh in ahead of the hearings.