US Supreme Court reverses lower court's Small Refinery Exemption decision

The price of complying with the US Environmental Protection Agency's Renewable Fuel Standard fell early June 25 after the US Supreme Court reversed a lower court decision, allowing small refiners to apply for an exemption after a lapse in application.

The Small Refinery Exemption was created under the RFS as a safety valve for refineries with a capacity of less than 75,000 b/d if the cost of compliance created financial hardship. The 10th Circuit Court vacated a previous EPA ruling giving the exemption to three refineries -- including HollyFrontier's Cheyenne plant -- after complaints from renewable fuel groups who felt that the refineries were ineligible for the exemption since they had "allowed previous exemptions to lapse."

PODCAST: US Supreme Court sides with refiners, RINs tumble

D6 RINs for 2021 compliance fell sharply after the opinion was released, after they were heard trading as high as $1.75/RIN earlier in the day.

S&P Global Platts assessed 2021 D6 RINs at $1.60/RIN on June 25, down from the $1.6675/RIN on June 24.

Platts calculated its Renewable Volume Obligation at 17.89280 cents/gal following the decision, down from 19.9377 cents/gal on June 24. Refiners and fuel traders watch the RVO - a value calculated using daily RIN prices and biofuel mandates - for per gallon compliance costs.

Trade group American Fuel and Petrochemical Manufacturers applauded the decision.

"The AFPM is very pleased with this ruling and hopes that EPA now moves expeditiously to provide critical relief to those small refiners that have demonstrated disproportionate economic harm resulting from the RFS," CEO Chet Thompson said in a statement.

Thompson noted the RFS compliance costs hit all-time highs this month, nearing 25 cents/gal, noting the program was jeopardizing the viability of refineries across the country, as all refiners wait for to learn their 2021 renewable volume obligation mandate. Missing the November 2020 deadline, the EPA now expects to issue preliminary numbers in July with final volumes released by the end of the year.

BIOFUEL INDUSTRY DISAPPOINTED BUT HOPEFUL

Understandably, the biofuel industry expressed disappointment in the ruling.

"Nearly a year and a half ago, the Tenth Circuit handed down a unanimous decision that was ultimately adopted by the very agency we took to court in the first place," coalition members said, according to a statement from the Renewable Fuels Association.

"While we are extremely disappointed in this unfortunate decision from the Supreme Court, we will not stop fighting for America's farmers and renewable fuel producers," the statement said.

Prior to the Supreme Court decision, some smaller refiners -- including CVR Energy and Calumet Specialty Partners -- had stopped buying RINs in an effort to conserve cash as they expected to receive SREs for 2019 and 2020

BROADER IMPLICATIONS FOR 2021

The broader implications of what the decision means for the EPA when they release the preliminary 2021 blending mandate in July remain unknown.

"While the resolution gives the EPA a clearer look at policy options available, it is still unknown whether the EPA will provide relief to refiners," said Phil Gresh, analyst with JP Morgan in a research note.

"While the SCOTUS ruling allows for continued granting of SREs, it in no way mandates the EPA to grant them," said Gresh.

According to the EPA website, there are 32 SRE petitions for 2019 and 18 SRE petitions for 2020.

"If the EPA were to grant these SRE petitions, then [CVR Energy's] and [Par Pacific's] balance sheet liabilities would effectively disappear for these years, at a minimum. On PBF, the positive here would be the RINs price impact on the balance sheet," he wrote.

The renewable fuel coalition said in its June 25 statement that they were optimistic that "other elements of the 10th Circuit decision" which were not reviewed by the Supreme Court, will compel a "more judicious" approach by the EPA and Biden Administration to the SRE than the previous administration.

These elements include two findings from the 10th Circuit still in place, according to RFA spokesman Ken Colombini.

First is "that refiners must show the RFS itself is the cause of any economic harm they are claiming (not some outside factor like Covid) and that refiners must show they can't pass their in costs on which we think will be impossible to show," he said.

REFINERS REMAIN WARY

A refining source familiar with the situation had said that the EPA was waiting to release their 2021 mandates until after the Supreme Court decision, because they want to see "where the pieces land" before issuing their 2021 mandates.

Gresh points out in his note that EPA could use the SRE as a tool to modify the RFS program or "attempt to shift the % obligation more toward biomass-based diesel and the attempt to lessen the requirement on total renewable fuel (primarily D6 RINs)."

Some refiners feel that despite the SRE ruling, while positive for refining, is limited.

""Although the Supreme Court made the correct decision, the sad reality is that their decision is limited to small refiners, and doubts remain whether larger independent refiners will be able to survive the disproportionate financial burdens imposed by the federal biofuel mandate," said a June 25 statement from the Fueling American Jobs Coalition.