Flooding bottles up US ethanol

read this at ArgusMedia.com.

Floodwaters in the US midcontinent have bottled up the country’s largest ethanol producing region, trimming production as plants wait for railroad repairs.

Devastating flooding in a key corridor along the Nebraska and Iowa border over the past week shut down rail routes and forced some ethanol plants to curtail production. The transportation outage has left some fuel blenders considering alternate sources of octane despite record US ethanol stockpiles.

“There is no doubt that production and transportation is being affected,” Iowa Renewable Fuels Association executive director Monte Shaw said.

An intense weather system last week dropped snow and then heavy rain through the northern plains, flooding the Missouri river along the Iowa, Nebraska and Missouri borders. River levels reached two feet above moderate flood stages in Omaha, Nebraska, on 17 March, and approached 30 feet, or within two feet of record levels, at St Joseph, Missouri, according to the National Weather Service.

Waters submerged or washed out miles of BNSF and Union Pacific track. Both railroads embargoed movements to certain destinations beginning late last week in Iowa, Nebraska and Missouri as routes became impassable. The number of BNSF ethanol rail cars that have not moved in at least 48 hours soared last week to more than 860 cars, according to the Surface Transportation Board — almost ten times the number of idle cars for the same week last year. The railroad reported routes connecting into Sioux City, Iowa, and to Omaha and Lincoln, Nebraska, as out of service as of yesterday. Union Pacific, which had fewer than 100 ethanol cars not moving for more than 48 hours over the same period, reported rail lines out of service in eastern Nebraska and as under observation between Illinois and Kansas across Missouri.

Flood warnings remain in place into next week for southwest Iowa and eastern Nebraska. The states combine for 40pc of installed US ethanol capacity.

Nebraska plants had not suffered flood damage, state ethanol board chairman Jan tenBensel told Argus. But the logistical constraint had cut production as plants deal with slower shipments to market, and raised concerns about delivering grain to some facilities.

“Most of the plants are going right now at a reduced pace, just waiting for the railroad to get cars to them,” tenBensel said.

Flint Hills Resources confirmed reduced rates at its ethanol plants in the affected area to manage slower rail movements south.

“We continue to operate, even though shipping is a challenge,” spokesman Michael Wilhelmi said.

The company separately confirmed disruptions to deliveries into Texas.

“Flint Hills Resources is adjusting our gasoline production to make up for the loss of ethanol to meet demand,” the company said.

Ethanol last year accounted for more than 10pc of the US gasoline supply, and offers a critical cheap source of oxygenate and octane for finished fuel. Fuel blenders without ethanol would turn to blending premium blendstocks into lower-octane unfinished gasoline, raising potential isolated shortages for premium gasoline.

Texas trade associations confirmed they were not yet seeking state support for federal fuel specification waivers. The Environmental Protection Agency did not comment on whether it received any requests for help from other states.

Magellan Midstream Partners and Kinder Morgan were both monitoring supplies but reported adequate inventories for customers.

Early warning

Refiners ask US not to block Venezuelan crude

7 Jul 2017, 9.16 pm GMT

Houston, 7 July (Argus) — Sanctions limiting imports of Venezuelan crude could increase US fuel prices and make domestic refiners less competitive, trade group American Fuel and Petrochemical Manufacturers told President Donald Trump’s administration today.

Prohibiting some or all imports from the country may divert the crude to Asian buyers instead of cutting off purchases, AFPM chief executive Chet Thompson said in a letter addressed to Trump.

“While placing sanctions on oil imports from Venezuela would not deny a market for this internationally traded commodity, it would likely hurt consumers and businesses right here in the United States,” Thompson wrote.

Foreign leaders and members of US Congress have pressed the United States for action as Venezuela teeters on government and economic collapse. But the administration, like its predecessor, has preferred non-intervention in the third-largest exporter of crude to the US.

US refiners process millions of barrels of Venezuela’s heavy crude production each year, especially in the US Gulf coast. The oil giant has seen its US market share erode under a combination of rising commitments to Asia and heavy crude flows from sources US customers consider more reliable. Venezuelan imports accounted for 14pc of the average 4.3mn b/d of heavy crude US refiners imported in 2016, according to the Energy Information Administration. The country accounted for 29pc of heavy crude imports in 2003.

Citgo’s 252,000 b/d refinery in Lake Charles, Louisiana, Phillips 66’s 247,000 b/d refinery in Sweeny, Texas, and Chevron’s 330,000 b/d refinery in Pascagoula, Mississippi, reported the largest average volumes of Venezuelan imports in 2016.

Turning away the crude would greatly reduce the limited volume state-controlled oil firm PdV can sell at full market prices. Oil-backed loan commitments to China and Russia, discounted regional supplies through Petrocaribe and local consumption claim much of Venezuela’s output.

Sanctions could further tighten an already narrow spread between light and medium crude on the US Gulf coast. The regional sour benchmark Mars averaged a $3.25/bl discount to Light Louisiana Sweet (LLS) in the second quarter, down 25pc from 2016 and down by almost half compared to the five-year average. Lower exports from Opec members including Venezuela have helped to reduce that discount. Further cuts to sour exports would add pressure to the US Gulf coast’s heavy refining complex.

Lost barrels could benefit Canadian exports, which steadily increase to the US as Venezuelan exports fall. Heavy crude production from Brazil or Colombia could also benefit from a halt in Venezuelan shipments to the US.

The US Treasury in May said it would review Venezuela’s pledge of part of its US refining subsidiary Citgo as collateral for a $1.5bn loan from Russia’s Rosneft. The US earlier this year sanctioned Venezuelan vice president Tareck El Aissami, who has broad powers in President Nicolas Maduro’s government, and other individuals in Maduro’s circle.

The US State Department condemned an attack on members of the Venezuelan National Assembly by armed government supporters on 5 July and criticized the government’s “increasing authoritarianism.” But the department lacks top policy personnel to address the country. The White House has demonstrated other priorities.

Retailers dispute refiners’ proposed RIN changes

Published date: 29 August 2016 at Argus Media

Proposed changes to federal biofuel mandates would slash liquidity for compliance credits without improving prices for consumers, fuel retailers tell Argus.

Vocal refiners facing rising costs have warned that the Renewable Fuel Standard (RFS) encourages market manipulation more than biofuel blending. But retailers including Murphy USA, a frequent target of refiners this year, said the complaints were misdirection.

“For an industry whose margins have collapsed by 50pc, it’s disingenuous to point to this, when I think the bigger issues are staring them in the eyes,” Murphy USA chief executive Andrew Clyde said.

Merchant refiners increased pressure this year to change the structure of federal mandates that require rising volumes of biofuels enter the domestic transportation fuel supply. The mandates measure volumes of biofuels such as ethanol or biodiesel blended with traditional fuel before shipping off to retail stores.

Refiners Valero, PBF Energy, CVR Energy and HollyFrontier all lack infrastructure to fully blend their own production, so they must purchase credits — called renewable identification numbers (RINs) — from blenders that do not need the credits under the program.

The refiners insist the system invites manipulation and blunts the program’s ability to achieve higher volumes of blending. Sellers of RINs have more incentive to profit off scarce credits than to blend fuels, they say, and speculators have helped drive RIN prices to unreasonable levels.

Opponents also claim Murphy and other retailers use revenue from the program to slash fuel prices and pressure smaller competitors.

Refiners have pushed the Environmental Protection Agency (EPA) in rulemakings and courts filings to make blenders obligated to purchase RINs. These efforts to change compliance split the industry, with more integrated downstream competitors reluctant to sign on and the trade association made up of oil majors openly opposed to the idea.

Retailers have remained largely silent in the debate. Murphy rebutted the refiner-proposed changes in comments on blending volumes the EPA proposed this year. A handful of small fuel suppliers also commented, all using similar language to criticize grocers and large retailers making “extra profit from selling RINs,” an echo of the refiner complaints about the system.

Retailers who sell RINs told Argus last week that refiners had exaggerated the program’s influence on their profits.

“The bottom line to us and many, many others is that if the EPA or Congress change the point of obligation, the consumer will pay more for motor fuels and less renewable products will be introduced into the market,” said Mike Thornbrugh, a spokesman for retailer QuikTrip.

QuikTrip declined to comment on its RIN sales revenues or to whom the midcontinent retailer sells the credits. Other privately held retailers contacted by Argus would not respond to questions.

Murphy singled out

No company has been more frequently cited by refiners critical of the program than publicly-traded Murphy USA, an almost 1,400-station chain anchored by Wal-Mart stores. The retailer reports revenue from RINs as a line item, allowing readers to easily track an increase from $5mn in the third quarter of 2013 to a peak of $44mn in the second quarter of this year — a period when the company saw $3bn in total revenue. The Murphy RIN revenue appeared in refiner filings to the Environmental Protection Agency and a Southern Methodist University paper suggesting RINs unfairly grant advantages to larger retailers.

Murphy does benefit from RINs, though not to the degree claimed by refiners, Clyde said. The retailer considers recent net gains of 2¢/USG to 3¢/USG following RIN sales a 9pc to 10pc return on its investment in the infrastructure needed to blend and deliver the fuel. Murphy owns line space on major products pipelines, operates blending infrastructure and purchases biofuels — all costs associated with the business that separates RINs, he said.

“It’s easy for people to selectively pull one number, the other income number, and not net it,” Clyde said. “It’s just as misleading for someone to report the cost of RINs without netting it against the refinery margin that has that increased spot price built into it.”

Refiners argue they cannot compel higher prices at blending racks, or spur those terminals to add biofuel blending capacity. But Murphy said it does see prices increased to offset compliance costs in barrels purchased directly from refiners. And the compliance credits offset a narrow, often negative margin between spot prices and the rack that intensifies when RIN prices climb, Clyde said.

Casey’s Convenience Stores reports income from RINs, but the 14-state retailer owns no blending or terminal infrastructure, chief financial officer Bill Walljasper said. The retailer instead collects RINs through a quirk of Iowa state law, where the company operates roughly a quarter of its stores. Casey’s receives RINs when ethanol splashes into the company’s truck fleet just before heading off to its stores.

Casey’s lacks infrastructure to increase or otherwise manage RIN access beyond the ebb and flow of outright fuel demand, he said.

“We don’t manage our business to RINs at all,” Walljasper said. Rather, the company sells to an obligated buyer twice a month, and had not seen any speculators seeking the credits.

Murphy’s used brokers to place RINs, but the third parties did not take title, Clyde said.

“We see no signs of this quote ‘rigged system’, and we’re selling to refiners either directly or through brokers,” Clyde said.

What the current system does have is liquidity, he said. Shifting the compliance to blenders would slash the volume of buying and selling, leaving all parties, including refiners, with an illiquid market.

Some merchant refiners have begun to draw closer to the distribution business. But midcontinent refiners HollyFrontier and CVR Energy said they cannot acquire such facilities for their midcontinent systems. And Valero doubts it could secure infrastructure to blend all of its production without raising federal market power concerns. The EPA has said it was not the intent of the RFS to change refinery business models.

EPA also cannot change a natural business cycle, Clyde said. US refinery margins for gasoline and diesel have crumbled as the industry’s advantages relative to global competitors faded with the price of oil this year.

“I think the refinery industry has a set of challenges on its hands that are completely independent of the RIN,” Clyde said. “It’s easy for them to look at our other income category and try to point to a windfall profit that doesn’t exist.”