July 26, 2013 / 11:09 PM / 4 years ago

Lyondell says its RIN costs may reach $200 million in 2013

NEW YORK, July 26 (Reuters) - Petrochemical company LyondellBasell, which operates a 280,000 barrel-per-day (bpd) Houston refinery, said on Friday its ethanol credit obligations, or RINs, could reach $200 million in 2013, up from $30 million last year, an increase that could pressure its refinery margins.

That was the forecast by LyondellBasell’s chief executive, assuming prices for those credits remain near last week’s high levels.

Refiners need ethanol credits, or Renewable Identification Numbers (RINs), to prove they have blended their share of renewable fuels into gasoline and diesel. If they do not blend, they need to buy a RIN for each gallon of ethanol. RIN prices peaked close to $1.50 last week then tumbled to below $1 on Thursday.

Speaking at an earnings conference call, the company’s CEO, Jim Gallogly, said rising RIN prices had almost doubled LyondellBasell’s spending on the credits to $50 million in the second quarter of this year.

The RINs market has been volatile this year as refiners fear a shortage should they not be able to blend enough ethanol. This prompted a rally in prices which last year were less than 20 cents and often at 5 cents.

Asked whether he had an estimate of the total RINs cost for the company in 2013, Gallogly said: “Well, I did a couple days ago, but I‘m starting to rethink that estimate.”

He said the company’s RINs obligation amounted to $25 million in the first quarter when prices averaged at 78 cents and $47 million in the second quarter when they averaged 91 cents.

“So if you took that and annualized it, you could get numbers in the $200 million range. But as I said, things have started to come in,” he said, referring to the fall in prices this week.

The increased cost of RINs was one reason why LyondellBasell’s refinery EBITDA earnings for the second quarter were $20 million, compared with $160 million a year earlier, which had been boosted by a $53 million insurance settlement.

The results were also hurt by a $18.49 per barrel crack margin, calculated using the Mexican Maya crude grade, which was $3 lower than the first quarter, and higher natural gas costs.

The refining industry has railed against the Renewable Fuels Standard (RFS) for years but have been especially vocal since the start of the year. The RFS directs refiners to blend ethanol into motor fuels and establish ethanol credits

Refineries argue that because the requirement to blend renewables rises volumetrically each year, while gasoline consumption falls, they will soon hit “the blend wall” whereby they would be required to blend more than they can safely do.

They also say they can only blend up to 10 percent of ethanol per gallon of gasoline or diesel as anything more could damage vehicles, for which they or gasoline retailers would be blamed. The ethanol industry disputes that, saying use of gasoline blended with 15 percent ethanol has been authorized in younger cars.

Refineries say ultimately the consumer will pay as they pass on the cost of RINs further down the chain or reduce supply of gasoline in the U.S. market by either exporting or producing slightly more jet fuel -- neither of which need a RIN.

“In the past, the export market provided some relief from this cost pressure. However, during the second quarter, the gasoline export market was very competitive and resulting weak export prices essentially eliminated this opportunity,” Gallogly said.

Like many refineries, he has called on the government to resolve the issue of the “blend wall” by reducing ethanol blending requirements.

“I‘m hoping that our Congress is seeing that the market is so distorted that the ability to blend that extra ethanol into the system doesn’t exist and it is hurting consumers at the pump. There’s a good reason to fix it now and save everybody a bit of money and stop this market distortion,” he said.

“It’s also forcing refiners to move product overseas, which is -- in the peak driving season with gasoline prices going up -- isn’t the right thing for our country.”

The ethanol industry has responded to such calls by refiners by saying the RFS succeeds in its aim of reducing reliance on foreign oil and cutting greenhouse gas emissions and says it creates billion of dollars worth of investment.

LyondellBasell as a whole posted second quarter revenues of $11 billion and EBITDA earnings of $1.65 billion, versus year ago revenue of $10.7 billion and EBITDA earnings of $1.59 billion.

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