* Refiners that blend more mitigate ethanol credit costs
* Refiners expect narrowed crude discounts to widen
By Kristen Hays
HOUSTON, Aug 1 Some independent U.S. refiners
took surging ethanol credit costs on the chin in the second
quarter, further squeezing profits already down because of
higher crude oil prices.
Many refiners buy ethanol credits to comply with
cleaner-fuel rules in the United States. Prices for the credits
surged during the quarter and could mean higher at gas stations.
"It all happened so fast that from my perspective, very
little was passed on to the consumer. We can't afford to absorb
this expense in the future," PBF Energy Inc Chairman Tom
O'Malley said during the company's earnings call on Thursday.
"The consumer will pay for this program," he said, as
refiners pass those costs along to the pump.
PBF, which runs three refineries in Delaware, New Jersey and
Ohio, saw its net income plunge by 78 percent in the quarter as
U.S. and Canadian crude discounts to London's Brent narrowed and
ethanol credit costs sharply rose.
The company spent $69 million on the credits in the first
half of the year, $37 million of that in the second quarter, and
expects to spend more than $200 million on them this year.
Refiners also reported lower profits as U.S. crude discounts
to London's Brent sharply narrowed, softening the advantages of
running more U.S. oil and fewer imports.
However, refiners say they expect the spread to widen again
as U.S. output grows, though not as wide as the more than $23
per barrel seen in February.
Last week, Valero Energy Corp, the nation's largest
refiner, said it spent $125 million on the credits during the
The impact hasn't been that strong across the board. Those
who do more of their own ethanol blending into refined fuels -
rather than leave it to pipeline companies or other third
parties - can help mitigate the costs. Blenders generate a
credit, while those who sell unblended fuels must buy so-called
Renewable Identification Numbers, or RINs, to meet the mandate.
Marathon Petroleum Corp, the third-largest U.S.
refiner with seven plants on the U.S. Gulf Coast and in the
Midwest, said it spent $20 million a month during the quarter on
the credits. The company is among those which blends much of its
own output, but must still buy more.
"We need to buy RINs because we don't generate enough to
meet our demand internally," Garry Peiffer, executive vice
president of corporate planning, investor and government
relations, told Reuters in an interview.
Western Refining Inc, a smaller refiner with two
plants in Texas and New Mexico, told investors that the company
can cover about 85 percent of its own RIN obligations.
And Exxon Mobil Corp, the second-largest U.S.
refiner, said on Thursday that it has enough blending capacity
to keep RIN costs minimal.
"We do generate the majority of our credits by blending our
biofuels directly," Exxon investor relations executive David
Rosenthal told analysts on Thursday.
PBF said the company would try to blend more of its own
gasoline in the second half of this year as it builds up a
marketing group. PBF also could export more product, as exports
don't require RINs.
"Our preference is to supply blended gasoline and/or
export," O'Malley said.
Marathon also is upping exports. The company hit an all-time
high of exporting 190,000 barrels per day of gasoline and diesel
during the quarter, up from 130,000 bpd in the first quarter.
Chief Executive Gary Heminger said that was "pretty much the
peak" of how much Marathon can export now, but the company is
investing to increase that level even further.
Such investments include a gasoline export tank and diesel
loading capacity at docs at its 522,000 bpd refinery in
The spread between U.S. crude benchmark West Texas
Intermediate and Brent shrunk to less than $3 a
barrel from more than $23 in February. That also affected some
major producers with refinery operations.
Heminger said Marathon expects it to widen to about $7 a
barrel as market volatility remains. O'Malley said the $20-plus
spreads were "insane," and he sees the spread settling at $2 to
$3 a barrel.
Analysts also expect the spreads to widen again as extra
pipeline capacity comes on stream to move Texas crude to the
Gulf Coast. Higher U.S. oil output will also offset crude draws
from the U.S. crude futures hub at Cushing, Oklahoma.
"On a short-term basis, refiners are going to see a
profitability squeeze from the narrowing spread," said John
Williams, investment analyst at T. Rowe Price. "But on a longer
time horizon, they will be able to make a little bit of money."