ESG & Industry Updates

Main energy topics in the headlines for 2014 include the Crude Export Ban, the Keystone Pipeline, the Climate Change Action Task Force, RFS Volumes, and an expected final ruling on the Tier III mandate from the EPA. 

(Photo Credit: Amanda Lucidon, WhiteHouse.gov Official Photo)

There is a lot of work to be done on energy infrastructure in the US - something that became especially clear with record breaking spikes in Natural Gas pricing to the New England and New York markets on the heels of the Polar Vortex. This topic is supposed to be the highlight of the Administrations Quadrennial Energy Review. However, the most obvious energy infrastructure and transport improvement - the Keystone XL pipeline is still bogged down in its 5+ years of paperwork, with no decision in sight, even following the most recent Environmental Study which found there would be no major negative impact environmentally from the project. The State Department review was expected after the President's State of the Union Speech, with a Presidential decision to follow but so far as of late February we haven't seen any movement on the issue. 

Renewables are also on the table - The EPA's expected final RFS volume reductions should be out this month (the first time the EPA will have used waiver power to decrease, not increase, volumes). The tax credits for Biodiesel and Cellulosic Biofuels also expired at the end of 2013, but if you recall, last time these were reinstated retroactively. The EPA is also expected to release its final ruling on Tier 3 Gasoline Standards, which would affect the sulfur content of gasoline vehicle emissions.

I wrote a more comprehensive article for the February issue of Oil & Energy Magazine on the topics on the Energy Agenda for 2014, you can read that article by clicking here 

What do you think the priority items on the Energy Agenda should be?    

Grassy Hillsides plowed into crop rows. Millions of acres of conservation land converted to corn fields. Fertilizer runoff polluting lakes and streams. All to produce a "green" fuel source.... Or that's the picture painted by an AP article slash expose anyway. 

The ethanol industry renounced the AP article as a "smear campaign" pointing out that fertilizer runoff and associated issues occur regardless of the end point of the corn produced. Another issue with the AP article is that the "conservation" land converted to corn fields wasn't exactly "conservation land" in the usual sense - essentially, much of it was designated conservation under an initiative that seemingly has less to do with conserving land than it does with boosting crop prices for farmers. While those points may be true, there is no doubt that corn based ethanol has environmental impacts, and there's even question on how much benefit to the environment the fuel itself produces, with the revelation that ethanol may be only about 16% "greener" than gasoline, which would technically disqualify it as a green alternative to gas.

The Senate has even introduced a bill to eliminate the ethanol portion of the RFS. This happened in December, just as the EPA announced it would reduce the ethanol blending goals in the standard. Not a good month for the Ethanol Industry, I would say. Senators Feinstein and Coburn - another unlikely alliance, cosponsored the bill. Both cited increased food costs as a result of diversion of corn into fuel supply, and the issues oil companies face with the blend wall - their inability to blend more ethanol into fuel without risking damage to consumer vehicles (that was the issue behind the EPAs reduction as well). [You can read a little more detail about the bill in my most recent Oil & Energy Article by clicking here]

So what does this all mean anyways? Its not likely ethanol will "go away" but both of these actions make it a little less burdensome on refiners and companies and protect the blend wall. It will be interesting to see how it shakes out over 2014 - the Obama administration strongly supports the corn based ethanol on the basis that it encourages biofuel adaptation in general and ethanol is a good starting point. There is no doubt that the mandate for corn based ethanol is extremely costly however, and with the undeniable impacts on food prices for both the industry and consumers, given the recent questions on the reality of its environmental impact, it seems to be time for politicians to really sit down and repair broken and costly regulations.  

A surprisingly unusual coalition of folks have united to support the EPA's reduction of RFS Volume Requirements including food industry leaders, environmental groups, humanitarian groups and oil industry groups. Why is that? 

Everyone involved has concerns about different impacts they believe are created or exascerbated by the mandate, especially if the volumes hold or increase. Refiners, for example are concerned about their ability to breach the "blend wall", where every gallon of gasoline would contain the required 10% - once thats hit it will be extremely difficult for refiners to generate the neccessary RINs, largely because of concerns about moving past an E10 blend.

Refiners and Motorist groups like AAA argue that E15 is not approved for use in a large portion of vehicles, and 13 major car manufacturers will even void warranty coverage in vehicles running E15. That's a huge issue for folks with cars that are not model 2014. Even the Ethanol groups numbers on this issue leave approximately 250 million vehicles on the road that cannot run properly on E15 - that's not good news for Joe Six Pack.

So why are Environmental groups throwing their support behind a Volume Reduction? Isnt Ethanol supposed to be "green"? Well, maybe not. Original numbers put ethanol at 16% greener than gasoline, and then theres the more obvious environmental impacts. An estimated 5 million acres of land that had previously been set aside for conservation have been converted into farm land for corn for ethanol. Fertilizer run offs have worsened a "dead zone" in the Gulf of Mexico, and contaminated some local water supplies as well, according to an AP investigation. 

Food producers oppose the mandate on the basis that diversion of corn for use in fuel versus the food supply has driven up the cost of animal feed, as well as corn used in processing itself. 

Beyond just supporting the Volume Reductions, the groups in question support a full repeal of the RFS in many cases. 

I wrote an article for Oil & Energy Magazine that gets a little more detailed on the RFS Reduction, you can read it here if you are interested: Oil & Energy Magazine 

What are your thoughts on the RFS Mandate and potential Volume Reductions?

In a move that was semi-surprising given the budget cut debates surrounding this years fiscal cliff talks, not only did law makers reinstitute the Biodiesel Blender Tax Incentive of $1 per gallon, but they did so retroactively to 2012.

The positives - or potential positives - of this decision are an estimated 30 thousand jobs sustained by the cut (112,000 versus a projected 82,000 jobs without the credit in place). Additionally in theory the credit serves to make domestic biodiesel competitive with Brazilian corn ethanol - currently ethanol blending into gasoline is the cheapest method of generating advanced biofuels to satisfy the EPA's RFS mandate. However, even with the credit in place, biodiesel still runs a significantly higher cost than ethanol. If biodiesel production does step up as a result of the credit and the RFS mandate, that could potentially prove a benefit for the United States economy, especially given that biodiesel is domestically produced, whereas we import most of the corn used for ethanol from Brazil because domestic corn does not satisfy the RFS "advanced" biofuel requirement.

On the negative side - given that ethanol is often cited as contributing to corn pricing spikes on  commodity and consumer product levels, it is reasonable to assume that increased biodiesel production and demand would have the same effect on soybean commodity prices as well as food items. Additionally, most of the projected benefits of reinstating the credit rest at least somewhat on the assumption that it will make biodiesel pricing competitive enough to compete with Ethanol - this is not really the case currently, and pricing structures on both products could prove unstable due to market volatility and competing uses for each items base commodity.

At the end of the day - my thought is a tax incentive on a mandated item is uneccesary, and appears more so given the uncertain nature of the benefits, and the solid $2 billion dollar price tag attached to this cut.

I wrote an article for Oil & Energy Magazine on this topic, if you want more info on the details of how the RFS mandate's ins and outs relate to this tax credit and why Brazilian ethanol's competitive advantage is tough to beat even with a dollar per gallon tax incentive. You can read the article online here: Oil & Energy Magazine - Feb 2013  or as a PDF by clicking here: Biodiesel Blender Tax Credit