NEW YORK (Reuters) - The U.S. Environmental Protection Agency has awarded tens of millions of dollars worth of biofuel blending credits for this year to refiners HollyFrontier (HFC.N) and Sinclair Oil after they argued the agency had wrongly denied them waivers from the country’s biofuels law as far back as 2014, according to two sources and public filings.
The release of the Renewable Identification Numbers, or RINs, marks the first reported instance of the EPA issuing tradable credits from previous years into the present market. It is likely to add fuel to an already fiery dispute between Big Oil and Big Corn over the future of America’s biofuel policy by opening the door to similar challenges from other refiners in the future.
The EPA confirmed on Thursday that it “has been revisiting some prior denials” of small refinery waivers. But those reviews currently do not extend beyond the HollyFrontier and Sinclair cases, an EPA source familiar with the process said.
The EPA’s move may put even more pressure on credit prices, which have plummeted to five-year lows amid the agency’s expansion of the small refinery waiver program. Credits fell to 20 cents each in early trading, down from 25 cents on Wednesday, on the Reuters report, traders said.
The U.S. Renewable Fuel Standard requires refiners to blend specific volumes of biofuels like corn-based ethanol into the fuel supply each year and prove compliance by acquiring RINs that can be either earned or purchased. The law has helped farmers by creating a 15-billion-gallon market for ethanol, but refining companies have complained it costs them a fortune.
At issue is the EPA’s responsibility to release small refineries from the regulation if they can prove complying would cause them “disproportionate economic hardship.”
The agency has historically been closed-fisted with the exemptions but has awarded an unusually high number under the administration of President Donald Trump. It now appears to be taking measures to compensate for denials made by the agency during the administration of President Barack Obama.
The EPA decided to give HollyFrontier nearly $34 million worth of credits for this year to reverse a denial for a waiver for one of its Wyoming plants dating back to 2015 and undisclosed millions more to Sinclair for two of its facilities in the same state for 2014 and 2015, according to the filings and sources, who asked not to be named.
Both companies had challenged EPA’s denials in a federal appellate court in Colorado in 2016. That court in August 2017 ruled EPA had erred in denying Sinclair’s applications for exemptions by being too strict in its definition of disproportionate economic hardship and remanded the case back to EPA to come up with a remedy.
The HollyFrontier case had been put on hold during the Sinclair proceedings and was also remanded back to EPA at the agency’s request, according to the filings and sources.
“In the first quarter of 2018, the EPA allowed us to generate new 2018 vintage RINs to replace the RINs previously submitted to meet the Cheyenne Refinery’s 2015 RVO,” HollyFrontier disclosed in its most recent quarterly filing, valuing the RINs at $33.8 million.
The sources said Sinclair was also given RINs for this year as a remedy, though it was unclear how many or what their value was in dollars. The company is private and does not disclose its financial data.
“EPAs actions are narrow in scope and consistent with direction from the 10th Circuit,” the EPA said in an emailed statement. “The Agency has been revisiting some prior denials in light of (the) recent court opinion.”
The biofuel industry slammed the move, saying it undercut efforts to bring more transparency to the market and posed a threat to farmers.
“It’s disappointing to say the least,” National Biodiesel Board Vice President of Federal Affairs Kurt Kovarik said.
HollyFrontier’s President and Chief Executive Officer George J. Damiris defended the waivers. He said by email that by granting them, EPA is following the law and underscoring their importance to small refineries.
Susan Schoolfield, a spokeswoman for Sinclair, did not respond immediately to request for comment.
Blending credits have a two-year life cycle, meaning that the companies’ 2014 and 2015 credits came due for delivery to EPA in 2016 and 2017. The 2018 RINs could be used to prove compliance with the RFS as late as 2020.
The EPA’s decision not to disclose the release of the RINs into the notoriously opaque credit market could also open up questions about the agency’s handling of market-sensitive information, according to Ed Hirs, an energy economist at the University of Houston.
“What the EPA did was issue a security and potentially conveyed a material advantage to these refiners without notifying the market,” he said.
The EPA is already facing at least two legal challenges and a wave of criticism over its handling of biofuels policy from corn farmers and their legislative backers who say the agency is undercutting a program Trump had vowed to protect.
The RFS was adopted more than a decade ago as a way to boost farmers, cut petroleum imports and reduce air pollution.
Caught between two key constituencies, Trump has been attempting to find ways to cut regulatory costs for merchant refiners like PBF Energy (PBF.N) and Valero Energy Corp (VLO.N) without angering farmers in the nation’s heartland, but has struggled to find solutions acceptable to both sides.
Reporting by Jarrett Renshaw and Chris Prentice; editing by Richard Valdmanis, Cynthia Osterman and Bernadette Baum