February 27, 2017

Five Takeaways from the National Ethanol Conference

Stratas Advisors

This report is of many available to subscribers of Stratas Advisors’ new Energy Perspectives service.

Stratas Advisors recently attended the Renewable Fuels Association’s (RFA) National Ethanol Conference (NEC) in San Diego on Feb. 20-22. We outline five key takeaways (in no particular order of importance) from the annual gathering that we think have current and future relevancy to Renewable Fuel Standard (RFS) and other policy developments, as well as discussions around domestic and international market dynamics involving the world of ethanol.

RFS point-of-obligation

In what could be described as a “contentious” panel discussion dedicated to the topic was of great interest to attendees. Richard Walsh, senior vice president and deputy general counsel, Valero Renewable Fuels Co. LLC, reiterated the company’s position to have the US Environmental Protection Agency (EPA) redefine “obligated party” under the RFS, arguing that moving the Renewable Identification Number (RIN) obligation away from refiners/imports to the terminal rack is a viable way to make the RFS compliance burden more equitable in the fuel supply chain. Walsh also argued that integrated oil companies, like Royal Dutch Shell plc, Chevron Corp. and BP plc (among others), which are represented by the American Petroleum Institute (API), are better equipped to capture higher RIN values than their merchant refiner counterparts, such as Valero, who don’t have vast physical blending capabilities. Those opposing the change argue that it will only create more complexity to an already complex market and that it could ultimately cause unintended market disruption. The deadline for industry participants and stakeholders to submit their comments to EPA was Feb. 22. 

Regulatory reform, tax policy

On a panel that featured RFA President and CEO Bob Dinneen, American Fuel & Petrochemical Manufacturers (AFPM) President Chet Thompson and API Executive Vice President and Chief Strategy Officer Marty Durbin, all were in agreement that incremental increases in Corporate Average Fuel Economy (CAFE) standards and electric vehicles pose as a threat to liquid hydrocarbon fuel growth prospects and that they should work together to advance the internal combustion engine. Thompson and Dinneen also agreed that the EPA’s midterm review of the CAFE standards late last year was “flawed”. All three also agreed there needs to be some form of regulatory reform, particularly when it comes to transparency and cost-benefit analysis during rulemaking processes. On tax policy, Durbin and Thompson said they're in favor of tax policies (i.e., corporate tax, etc.) under the Trump administration that stimulate growth, but want to see more analysis on their impacts on consumers and trade. 

Prospect of higher ethanol-gasoline blend penetration

John Eichberger, executive director, Fuels Institute, said that future prospects of additional E85 sales has run its course and that E15 stands as having the better chance of growth in the next five years. He noted that flex-fuel vehicle sales in 2017 is expected to be at an anemic 9.6%, reflecting slow E85 sales uptake, and that CAFE standards will eventually eat into gasoline demand by 23% come 2035. Rick Long, general manager and associate general counsel, Petroleum Equipment Institute, which represents retail fuel equipment makers, said that compatibility issues with ethanol in hoses and pumps is not the most limiting factor when it comes to higher ethanol blends; rather, bigger issues pertain to storage capacity limits at retail fuel sites. He also noted that E25 potentially “has legs” to gain an entry point for growth in the market, but growth is heavily dependent on fuel station commitment toward investment to build out such infrastructure. Consumer demand of the product obviously justifies such an investment. 

RVP waiver limiting higher ethanol blend sales

The RFA continues to urge EPA to remove the 1-pound per square inch (psi) Reid Vapor Pressure (RVP) restriction on E15 sales that goes into effect from June 1-Sept. 15 of every year. In 2011, EPA approved the use of E15 in 2001 and newer vehicles, but the agency did not allow E15 to benefit from the RVP waiver that is made available to E10 blends. The organization contends that RVP parity is critical for higher ethanol uptake and is a “relic of a bygone era”. In early February, the RFA sent a letter to new EPA Administrator Scott Pruitt asking him to address this issue. 

Opening up export markets

China has historically been one of the US ethanol industry’s largest export destinations. However, in late January, the country recently slapped an import tariff of 30% from the prior 5% for the year. Despite nominal, if any, ethanol exports expected to head to China this year US ethanol participants were sanguine about other, perhaps more promising export markets for their product, such as Brazil, South Korea, India and the Philippines, to name a few. Additionally, Mexico is also being heralded as a promising destination for ethanol exports. While MTBE is still the predominant gasoline oxygenated blendstock in Mexico, the Energy Regulatory Commission of Mexico (CRE) in August 2016 published a fuel regulation (NOM-016-CRE-2016) in the Mexican federal register allowing for the blending and sale of up to 5.8% ethanol in the nation’s fuel supply outside of the three major metropolitan areas of Mexico City, Guadalajara and Monterrey. The RFA is working with various national and international organizations and consultancies to raise the ethanol blend level to 10% before 2021.