AM-17-21 Operating Refineries in a High Cost Environment - Options for RFS Compliance

Description:

The past decade has been an exciting—but challenging—time for operators of petroleum refineries in the U.S. The advent of the shale oil revolution has led to lower crude oil costs, as well as lower natural gas prices, which together have significantly improved the cost competitiveness of U.S. refineries in the world market. However, partially offsetting these developments has been a plethora of new regulations which have added to refinery operating costs. Foremost among these regulatory initiatives have been changes in product specifications (e.g., lower sulfur requirements in diesel fuel and gasoline) and the requirement to blend certain proportions of renewable fuels into the refinery’s light oil products. Lower sulfur specifications have led to an increase in total refinery production costs, both through the need for new capital investment as well as direct increases in fixed and variable processing costs. The requirement to blend renewable fuels has in some ways been a double edged sword. For example, the requirement to blend 10% ethanol in gasoline expands the gasoline pool and provides needed octane for many octane-short refiners. On the other hand, if—as is the case with many merchant refiners—there is little or no ability to conduct such blending, the refiner must purchase so-called Renewable Identification Numbers (RINs) from the ultimate blenders. As the gasoline pool has approached the “blend wall” (the maximum volume of ethanol that can be accommodated), the price of RINs has risen sharply, resulting in excessive compliance costs for many refiners. The following timeline shows some of the key events that have challenged (or benefited) U.S. refiners over recent years.