By Elizabeth Hilbourn and John Auers
Over the past two weeks we have used two of The Doors classics, “Riders on the Storm” and “Roadhouse Blues,” as lead in’s to a discussion of various issues associated with the Renewable Fuel Standards (RFS). We’ve looked at both the ethanol “blendwall” and a softer biodiesel “blendwall”. While ethanol limitations have received most of the press, the potential for refiners and blenders encountering challenges in meeting RFS imposed rules on the diesel pool is becoming more and more likely. In today’s blog we delve into the details of those requirements and challenges and thought “People are Strange,” was a very appropriate Doors tune to use in discussing some of the particulars of this issue.
We’ll start by looking at what the industry might expect in regards to the requirements for next year. As we all know, on the day after Independence Day (July 5), the EPA issued their proposed 2018 renewable fuel standards. The proposed standards were almost identical to the final 2017 standards though significantly higher than final 2014-2016 standards (see Table 1 below). Most refiners reacted favorably to the proposed standards, happy that the volumes stayed well below the original statutory guidelines for 2018 and appeared to recognize real market limitations (such as the “blendwall”).
But a proposal is just that and what will really matter is what the final standards look like. As such, it is instructive to review how the final mandated volumes compared with the originally proposed levels. For the first six years of the program the proposed standards were consistently the same as final (see Table 2 below). But that was not the case for 2017, with the final rules substantively higher than the originally proposed mandated volumes.
Table 2 shows that there is essentially no historical precedent for determining if the final will be significantly different than the proposed. However, it is instructive to note from Table 1 that the biomass based diesel has been increasing at 5% or more annually other than for the proposed 2019 requirement. If this trend were to continue it could quickly tighten and challenge the softer biodiesel blendwall. In “Riders on the Storm,” we discussed the 5% soft limit of biodiesel in diesel. Production and importation of biodiesel may be reaching limitations. This blog will discuss potential biodiesel (and renewable diesel) production and importation limitations. Also, consider that in 2016, the biomass-based diesel RIN has carried much of the advanced biofuel requirement and some of the renewable fuel requirement.
“Streets are uneven when you’re down”
Figure 1 shows that monthly U.S. biodiesel utilization has been approaching 80%. You can also see that U.S. biodiesel production is very seasonal with peak rates being in the summer and low rates being in January. In comparison, U.S. refinery utilization is in the upper 80 percentile. Current operable biodiesel plants are generally running at or close to capacity. There have been recent biodiesel plant expansions. More expansions are planned for the future, including new plants. The increase of biodiesel production over the last several years has been more from plant acquisitions into stronger hands than new construction. Consider a major U.S. biodiesel operator, the Renewable Energy Group, Inc. (REG). Only its first biodiesel plant in 2002 was constructed by REG. The other nine biodiesel plants and one renewable fuel plant were all acquisitions. Two recently acquired REG biodiesel plants (Atlanta and Clovis) are under construction and two larger ones (Emporia and New Orleans) are new construction.
Figure 2 shows that though U.S. biodiesel plant capacity has increased, it has had a lot of swings as plants have been shut down, sold, acquired and restarted. In fact, the capacity now is almost the same as the capacity at the beginning of 2012.
“Faces come out of the rain”
Table 4 lists four planned biodiesel plant expansions totaling 4 MBPD and the 2018 planned Diamond Green renewable diesel expansion by 8 MBPD. Table 5 lists sixteen new planned biodiesel plants with a combined capacity of 41 MBPD and three new renewable diesel plants totaling 24 MBPD.
As of July 2017, current U.S. biodiesel and renewable diesel capacity is 2.3 BGPY and 0.2 BGPY respectively. Planned expansions and new construction could increase capacity by 30%.
“No one remembers your name”
Figure 3 shows cumulative biodiesel and renewable diesel imports and production. Not included is domestic renewable diesel production which is expected to be less than 15 MBPD since that is the capacity of the U.S. renewable diesel plants owned by REG and Diamond Green. Note that biodiesel and renewable diesel imports comprise a significant part of renewables in diesel or said another way, a significant percentage of D4 generation. As mentioned in “Roadhouse Blues,” if the $1/gallon biodiesel tax was excluded from imports, there would likely be significantly less imports and D4 generation and, therefore, the prices of D4 RINs would likely increase. Renewable diesel imports have not increased much since 2013; however, biodiesel imports increased substantially in 2016. It is hard to say where biodiesel imports will end up in 2017 since the 75% of the biodiesel is imported in the last half of the year. Renewable diesel imports come from Neste, and all of the imports have been from Singapore since September 2014. Prior to September 2014, 20% were from Finland, but that volume has been taken away by the European market.
“Faces look ugly when you’re alone”
Figure 4 details U.S. biodiesel imports of which the far majority has been from Argentina, starting in 2013 when the European antidumping laws went into effect. A significant amount of biodiesel is also imported from Canada and Indonesia. The U.S. International Trade Commission voted in May of this year to continue a U.S. Commerce Department investigation into alleged dumping and unfair subsidies of biodiesel fuels from Argentina and Indonesia. Soybean oil futures have not shown significant increases, and particularly have not reached 2014 highs which were 30% higher than today’s so it is hard to believe that anything will come from the investigation. Argentina currently exports to the U.S. more biodiesel than it consumes though Argentina has a 10% biodiesel mandate which is mostly filled by the smaller producers. Argentina also currently exports a small amount of biodiesel to Peru. Argentinian biodiesel plant utilization has ramped up from 40% in 2014 to 60% in 2016, and biodiesel export levels have not topped 2011 and 2012 levels when exports went to the European Union.
“When you’re strange”
TM&C constantly monitors changes and proposed changes in regulations which can impact all segments of the petroleum industry. Many of these are associated with transportation fuels, affecting not only demand, but also production costs, compliance challenges, and other aspects of petroleum refining. We include our independent analyses of these impacts in our semiannual Crude and Refined Products Outlook (scheduled to be released in early August) and our various other studies. TM&C also assists clients involved in all aspects of transportation fuel production, blending activities, planning and compliance-monitoring. More information on these publications and our other work involving oil industry developments and dynamics can be obtained by contacting either one of us, visiting our website at turnermason.com or calling Shanda Thomas at 214-754-0898.