Ratings agency Moody's expects US refiners to increase investments in renewables blending and infrastructure if federal renewables targets are not lowered.
"In the absence of any EPA waivers to meeting the renewable fuel requirements, we expect refiners to increase their investments in blending logistics infrastructure, ethanol production facilities and renewable fuels technology," Moody's said in a report Wednesday.
It cited Valero Energy's investment of more than $300 million in Diamond Green, a 9,300 b/d biodiesel joint venture expected to be online before mid-2014. Moody's also said Valero expects to have its ethanol facilities operating at better utilization rates. A spokesman for the refiner, however, told Platts recently that meeting renewables targets was not why it was boosting output from its ethanol plants.
Refiners can meet growing renewables targets in several ways, including by blending more renewables such as ethanol into petroleum transportation fuels like gasoline, which in gasoline's case takes away market share and goes against most car warranties, by buying renewable credits known as RINs and investing in their own renewables production.
Many refiners are choosing to buy ethanol RINs rather than blend at levels above the 10% "blend wall."
The blend wall has been created as renewables targets rise and gasoline demand has flattened out, with most cars only taking a 10% ethanol-gasoline blend called E10. Increased trading in RINs has boosted their value, with ethanol RINs valued Wednesday at about 70 cents/RIN, up from 7 cents/RIN in January.
Valero, which does not blend much gasoline and doesn't have enough of its own ethanol production to meet its federal mandates, expects to pay $500 million to $750 million for RINs this year.
"A dramatic rise in the cost of complying with federal renewable fuel requirements poses a headwind for the US refining and marketing (R&M) industry in 2013-2014 and possibly beyond," Moody's said.
It said rising gasoline exports, which do not fall under the Renewable Fuel Standard (RFS) mandates, "could be an increasing trend in the industry, constrained only by logistical and infrastructure limitations."
Gulf Coast refiners such as Valero, Marathon Petroleum and Phillips 66 could hike gasoline exports to Mexico and countries in South America to avoid RINs exposure, according to Moody's.
"But US refiners with extremely limited access to the coasts, such as HollyFrontier (Ba1 stable), CVR Refining (B1 stable) and PBF Holding (Ba3 stable) would have limited opportunity to export their gasoline as a way to avoid buying RINs," Moody's said.
Another option open to refiners is to pass the higher RINs prices on to consumers at the pump, something Moody's believes could add to pressure for the Environmental Protection Agency to alter its RFS program.
While near-term RFS waivers may not be granted by EPA, the agency "might relax its RFS2 standards in the face of significantly higher crude oil production in the US, declines in gasoline consumption, practical constraints for refiners, and perhaps most importantly higher prices for consumers," Moody's said.