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RINs and US Distillates Exports

Matthew Cook, Sr. Managing Editor – US Clean Products January 31, 2014

• The US exported more distillates than ever – Supported by cheap crude and weak domestic demand – RINs provided incentives

• RINs landscape could change – EPA yet to issue final decision

• Will the trends continue into 2014? – Refiners looking to expand

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A look back at 2013

US exports grew to record heights

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Source: US Energy Information Administration

US Distillate Exports

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Source: US EIA

US Distillate Production

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Source: US EIA

US distillate demand stable

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Source: US EIA

Excess distillate production

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Source: US EIA

The four-letter word of the year

• What are RINs?

– Renewable Identification Number

– Renewable fuel credit required for US refiners, importers and blenders

– Credit required to meet US renewable fuel mandate

• What’s the big deal?

– Gasoline consumption sharply lower than anticipated

– The “Blend wall”: Literally not enough gasoline consumed to meet federal mandate with current fuel blends

– Gasoline producers still on the hook to meet requirements; sharp increase to fuel production costs

RIN lifecycle

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Source: US EIA

Renewable credits blow out

• Ethanol, the biggest driver, went from $0.03/RIN in 2012 to peak at $1.44/RIN in July.

• Per-gallon RVO basket: ~10% of ethanol RIN value

10 Source: Platts data

Unintended consequences

• Implications of the blend wall: – RINs needed for imports could mean further

decline in fuel imports – Stronger prices for US consumers – Non-transportation fuels mirror RINs

• Two solutions: – Change renewable fuel standards – Migrate to E15 gasoline blend

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Speedbumps for E15

• US Department of Energy: More than 90 laws across 30 states limiting E15 sales

• Auto industry acceptance remains a barrier – Questions about warranties, despite EPA approval – Older vehicles?

• Requires additional infrastructure, distribution investment

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• EPA proposes cut to 2014 renewable targets – 15.21 billion gallons in 2014; down 8% from 2013 – 36 billion gallons by 2022 – Renewable Fuels Association calls to follow 2007

mandate of 18 billion gallons

• Public comment period ended Tuesday – More than 16,000 comments received – EPA says 60-90 days to review

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EPA revising standards

• Valero building new units at USGC refineries: – New hydrocrackers at 290,000 b/d Port Arthur, Texas and

205,000 b/d Lake Charles, Louisiana refineries – Expanding 125,000 b/d Meraux, Louisiana, refinery – System wide distillate yields expected at 43% by 2015

• Marathon expanding Texas City, Garyville refineries – Dock expansions; new gasoline export tank – Expecting exports up 30,000 b/d to 275,000 b/d

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Refiners eyeing export expansions

• New York moved to 15 ppm heating oil July 2012 – “Exactly the same” as ULSD

• Other states adopting ULS Heating Oil by 2018 – New Jersey: 2016 – Maine, Vermont & Massachusetts: 2018

• Platts begins publishing ULSHO July 1, 2013, for USGC – Assessment reflects deliveries into Colonial Pipeline at origin – Specifications match Colonial 67 grade – Instrument trading on eWindow

• 2,000 ppm sulfur heating oil (88 grade) fading out

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Heating oil change boosts ULSD demand

Strong ties between ULSHO & RINs

• ULS Heating oil effectively USLD without RIN obligation – Spread between ULSD and ULSHO closely tracking RIN value – Correlation of +0.95

16 Source: Platts

Winter weather drives ULSD higher

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• USAC Production at lowest level since Nov. 2012 – Polar Vortex pushes refinery runs to 70%

• Two cargoes seen moving from Europe to NYH – Imports from Canada as well – Arriving early February

• New York officials considering sulfur waiver

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Cargoes routed to NYH

EPA proposes new gasoline specifications

• US EPA introduced TIER 3 gasoline specifications to further reduce pollution – Major change to 10 ppm sulfur, 60% cut from

current spec • Significant refining investment required

– Questions about viability of imports – Another credit trading program?

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Questions? Matthew Cook, Sr. Managing Editor 713-658-3208 [email protected]