An evolving industry and current regulations are just a few items that continue to change the structure of the North American refining sector of the oil and gas industry. Specifically, there are two regulations that could potentially affect operations: the border-adjusted tax and the Renewable Fuel Standard (RFS).
The House of Representatives has proposed adopting a tax to levy the domestic cash flows of all businesses operating or selling in the United States and cutting the corporate tax rate from 20 percent to 35 percent. This calls for an introduction of “border adjustments” to the current system, specifically exempting exports from taxation but taxing imports, thus potentially “overhauling” the U.S. tax code, which would raise consumer prices and upend energy and commodity trade flows, according to Platts.
In the shorter term, “we expect higher prices, higher margins, trade flows unaffected and increased costs,” stated Dan Romasko, president and CEO, Motiva Enterprises, speaking on a panel at the recent CERAWeek by IHS Markit in Houston. In the longer term, “we’ll see increased U.S. production, domestic demand erosion, decreased crude imports and decreased global competitiveness.
“When you put all this together, it’s hard to imagine that the consumer of the U.S. will accept this, as they are the end payer for this border tax. As the price increases, they are the ones, essentially, who pay it. I can’t imagine that they’d think anything differently than that this is an energy industry subsidy.
“If there is a material impact to the trade deficit due to the full border tax implications — not just in our industry but in all industries in the U.S. — then you would expect for the dollar to appreciate relative to foreign currencies, and that has detrimental impacts on our operating costs.”
The second issue is the RFS program, which is a national policy that requires a certain volume of renewable fuel to replace or reduce the quantity of petroleum-based transportation fuel, heating oil or jet fuel, according to the EPA. The four renewable fuel categories under the RFS are biomass-based diesel, cellulosic biofuel, advanced biofuel and total renewable fuel.
Romasko stated smaller U.S. refiners that cannot blend their own gasoline would feel the Renewable Identification Numbers’ (RINs’) price in their refinery operating costs. Last year, the EPA increased the mandated amount of renewable fuels to 18.11 billion gallons, almost doubling the RIN prices.
According to Platts, the majority of gasoline sold in the U.S. is 10-percent ethanol, so it leaves smaller refiners or those without blending capability the ability to buy RINs — credits that allow them to make up the difference.
“Let’s use ethanol as an example: A refiner will use its RIN credits to blend a finished product with a gallon of ethanol ( a clean fuel), blend it and then distribute it to a terminal,” Romasko explained. “That terminal blender/marketer gains back that value or ‘credit’.
“If there is no obligation, no correlation between the two — the RIN and the profitability segment — the question posed is: Who is pocketing this RIN? The answer is no one is. It is a simple artifact of the accounting procedures and policies. What impacts the margins across the refineries is what is always impactful — that’s supply and demand variables.
“The RFS has proven to not be effective as much as the EPA may wish. Now, when you look at these two issues and ask what lessons one has to teach the other — and maybe it’s as simple as the complexity of trying to predict regulatory impacts and attempts to manipulate a single variable: the free market — those impacts are very difficult to predict as well as the outcomes.”
