(Reuters) - Refiners are paying nine times what they were paying three years ago for a limited supply of sulfur credits, with prices surging ahead of a year-end deadline for the industry to comply with U.S. smog-busting regulations, according to industry sources.
The credits are trading for more than $4,000 a credit, the sources said, up more than 900% from the end of 2016, when new emissions standards for gasoline went into effect, trading sources said this week.
Sulfur credits are awarded by the U.S. Environmental Protection Agency once a year to refiners that produce gasoline with an annual average exceeding 10 parts per million (ppm) of sulfur. The goal was to cut dirty sulfur emissions in gasoline, as the U.S. gasoline pool averaged about 21 ppm in 2018, according to the Environmental Protection Agency (EPA).
Refiners buy credits in an opaque marketplace to comply with so-called Tier-3 regulations, which took effect for the majority of refiners in 2017. The credits offset the difference between the sulfur content of the gasoline they produce and the 10 ppm requirement.
However, very few credits exist due to the cost to refiners of investing in capital projects to reduce the sulfur content of gasoline, according to traders. Many U.S. refiners have delayed the cost of these projects, which run into millions of dollars.
Small refiners that were allowed to delay compliance with the Tier 3 standards in 2017 will no longer be exempt as of Jan. 1, 2020.
Demand from non-compliant refiners for the credits has driven up prices, said George Hoekstra, an independent consultant specializing in hydroprocessing technology.
“Underperforming refiners will have to pay billions of dollars to buy credits to cover for the gasoline they produce in 2020 that is over 10ppm sulfur,” said Hoekstra.
It was unclear which refiners have been producing non-compliant gasoline, though some refiners have addressed their readiness in quarterly earnings calls.
Phillips 66 is producing gasoline with sulfur content “comfortably below” where the overall industry is, said Jeff Dietert, vice president of investor relations, in a July earnings call. He added that the spending on Tier 3 capex is within the normal range of the company’s sustaining capital spending at the refiner.
Standard sulfur credits are valid for five years after the year they were generated. Tier 3 credits initially generated by refiners from 2012 to 2016 were set to expire at the end of this year, further limiting supply. The earlier sulfur credits were generated by refiners who produced less than 30 ppm of sulfur in their gasoline.
“As these credits expire, it will become more difficult and expensive to generate sulfur credits as refiners will need to exceed the 10 ppm standard,” said Tom Kloza, global head of energy analysis at the Oil Price Information Service (OPIS).
Tier 3 credits are generally awarded in the early months of a year, based on a refiner’s prior year record.
Reporting by Laura Sanicola; Editing by David Gregorio