UPDATE 2-U.S. refiners rail against costly ethanol credits

Tue Mar 19, 2013 2:16pm EDT

* Refiners say higher costs of RINs will hit the pump

* Could squeeze supply with more fuel exports, fewer imports

By Sabina Zawadzki and Cezary Podkul

SAN ANTONIO, Texas, March 19 (Reuters) - Hedge funds and others looking to bet on prices of U.S. ethanol credits should not use that market as a "casino," the chief executive of HollyFrontier Corp told refining executives on Tuesday.

HollyFrontier Corp Chief Executive Mike Jennings joined an increasingly loud chorus of U.S. refiners facing higher costs under a federal mandate that petroleum-based fuel producers blend increasing amounts of renewable fuels, such as ethanol and biodiesel, into gasoline and diesel fuel each year.

The price of the credit known as Renewable Identification Numbers, or RINs, issued for each gallon of biofuel produced spiked dramatically from a few cents in January to more than a dollar this month, then back down to the 60- to 90-cent range, sparking concerns about those costs eating in to profits or pushing gasoline prices up at the pump.

"The notion that commodity brokers, hedge funds, and other non-obligated parties are participating in this market, and using it as a casino, defies both logic and the intent of the Renewable Fuels Standard (RFS)," Jennings told refining executives on Thursday at the annual meeting of the American Fuel and Petrochemical Manufacturers (AFPM) in San Antonio, Texas.

"Instead of increasing renewable fuels blending, the mechanics of this program are producing higher prices at the pump, which will probably reduce overall consumption, including that of biofuels," he said.

Gasoline demand in the United States has declined since 2007, while the amount of ethanol they must add to it under the 2005 RFS continues to rise. Refiners are reluctant to blend more than 10 percent - the so-called "blend wall" - as that is the level automakers deem safe for engines and anything higher could leave refiners liable for vehicle damage.

But if they cannot meet the mandate or they let others do their blending, they must buy the credits known as RINs in the market to cover that obligation or face large fines.

The ethanol industry, meanwhile, argues that the refining industry is driving up gasoline prices and RIN values by refusing to blend up to 15 percent of ethanol per gallon of gasoline, as allowed by the U.S. Environmental Protection Agency.

The Renewable Fuels Association says that would ease the demand for RINs and reduce gasoline prices.

Refiners can carry over RINs from previous years if needed, which has been the practice since the mandate was imposed in 2007.

But now that they are reaching the blend wall, concern is high that all the available RINs will be bought up in 2013 - in a high-priced, volatile market - leaving refiners hanging next year.

"You're not really at the blend wall until 2014," Bill Klesse, chief executive of Valero Energy Corp, the largest U.S. independent refiner, told reporters at the conference.

"So what it is, is anticipation. You can tell people are buying RINs, hoarding RINs, keeping RINs, not selling RINs - they think prices are going higher, and when you get into a squeeze, how high is the price?" he told reporters.

UNINTENDED CONSEQUENCES

Paul Eisman, chief executive of Alon Energy USA, one of the nation's smaller independent refiners, told Reuters in an interview that the increasing mandate not only encourages refiners to export more gasoline, it discourages imports. Exported gasoline faces no mandate -- while imports do, adding to importers' costs.

"The effect that potentially has on the supply of gasoline in the U.S. and the price of gasoline will be something that has an impact,' Eisman said. "A high RINs cost inventivizes the export of gasoline and disincentivizes the import of gasoline."

Klesse told reporters that the U.S. government must address the issue because consumers will feel the effects with higher pump prices.

"This isn't the intent of the (Renewable Fuels Standard) program and the consumer at the end of the day is going to pay," he said.

The price added at the pump would be 10 percent of the price of the credit because each RIN represents a gallon of ethanol.

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