# Small Refinery Exemption Study

An Investigation into

Disproportionate Economic Hardship

Office of Policy and International Affairs

U.S. Department of Energy

March 2011i 

# For Further Information

This study was prepared by the Office of Policy and International Affairs under the direction of Carmine Difiglio, Deputy Assistant Secretary for Policy Analysis.

Specific questions about information in this study may be directed to Peter Whitman, Senior Policy Analyst ( peter.whitman@hq.doe.gov ) or Tom Wh ite, Senior Policy Analyst ( thomas.white@hq.doe.gov ).

Contributors include Diwakar Vashishat of DOE; Mindi Farber

- DeAnda, William Keene, Gary Brush, Matthew Cleaver, and Conor Hackett of SAIC; and David Hacket t, David Bulfin, Barry Schaps, and Susan Grissom of Stillwater Associates.ii 

# Table of Contents

Executive Summary.............................................

. ...... . ...................................... v i

I. Study Objectives

................................ ................................ ................................ ....................... 1

II. RFS Regulations

................................ ................................ ................................ ....................... 3

III. RINs

................................ ................................ ................................ ................................ .......... 6

How RINs Are Used to Ensure Compliance with the Renewable Fuel Standard

...................... 6

Renewable Fuel Standard Volume Requirements and RIN Values Obligated Parties

............... 8

Calculation Issues

................................ ................................ ................................ ....................... 8

The Value of RINs

................................ ................................ ................................ .................... 10

IV. The Blend Wall

................................ ................................ ................................ ....................... 13

Contributing F actors to Reaching the Blend Wall

................................ ................................ .... 14

How Close is the Blend Wall

................................ ................................ ................................ .... 16

Consequences of Reaching the Blend Wall

................................ ................................ .............. 17

E15 and the Blend Wall

................................ ................................ ................................ ............ 17

V. Evaluating the RIN and Ethanol Markets

................................ ................................ ............... 19

VI. Determining Compliance Cost

................................ ................................ ................................ 21

VII. Refinery Classification

................................ ................................ ................................ .......... 23

Refiner

- Blender Integration

................................ ................................ ................................ ...... 24

VIII. Small Refinery Exemption

................................ ................................ ................................ .... 24

IX. PI

- 588 Survey

................................ ................................ ................................ ......................... 25

X. Refinery Vi ability

................................ ................................ ................................ ................... 27

XI. Disproportionate Economic Hardship

................................ ................................ ..................... 31

Assessing Disproportionate Economic Hardship

................................ ................................ ...... 32iii

Disproportionate Impacts Index Analysis

................................ ................................ ................. 33

Viability Index Analysis

................................ ................................ ................................ ........... 36

Recommendation for Exemption Extension

................................ ................................ ............. 37

XII. Findings and Conclusion

................................ ................................ ................................ ....... 37



# Appendices

Appendix A. Glossary

Appendix B. RFS Market Operations

, RINs and the Fuel Supply Chain

Appendix C. DOE Ethanol Model Description

Appendix D . PI

- 588 Survey Form

Appendix E . PI

- 588 Survey Response

Appendix F . Refinery Profiles

Appendix G . Analysis of Refinery Shutdowns

Appendix H. Disproportionate Economic Hardship



# Table of Figures

Figure 1. Comparison of RFS1 and RFS2 Volume Requirements

................................ ................. 5

Figure 2. Historical Renewable and Biodiesel RIN Prices

................................ ........................... 11

Figure 3. Carry

- Over and Current

- Year RIN Prices

................................ ................................ ..... 12

Figure 4. RINs Prices Track the Ethanol

- RBOB Spread

................................ .............................. 13

Figure 5. RFS2 and U.S. Motor Gasoline Demand

................................ ................................ ...... 17

Figure 6. Small Refineries Receiving the PI

- 588 Survey

................................ ............................. 26

Figure 7. U.S. Refining Margins and Shutdowns, 1990

- 2010

................................ ...................... 28iv

Figure 8. Sample Refining Margins for Large and Small Refiners 2004

– 2009

......................... 29

Figure 9. U.S. Refined Product Environmental Regulations 1990

- 2010

................................ ..... 30

Figure 10. Crack Spread Differentials

................................ ................................ .......................... 32

Figure 11. Refinery Rankings by PADD

................................ ................................ ...................... 37



# Table of Tables

Table 1. RR Code Definitions

................................ ................................ ................................ ......... 7

Table 2. D Code Definitions

................................ ................................ ................................ ........... 7

Table 3. RFS2 Annual Volumetric Requirements (Billion Gallons)

................................ .............. 9

Table 4. Standards for 2011

................................ ................................ ................................ ............ 9

Table 5. Blend Wall Contributing Factors

................................ ................................ .................... 15

Table 6. RIN Scenarios Description

................................ ................................ ............................ 20

Table 7. RIN Pr ice Scenario Results for 2011 and 2012 (2009 $)

................................ .............. 20

Table 8. Sample Obligated Party RINs Costs for 2010

................................ ................................ 21

Table 9. Refinery Survey Responses by PADD and Ownership [CBI] used in Disproportionate Economic Hardship Analysis

................................ ................................ ................................ ........ 27

Table 10. Disproportionate Structural Impact Metrics

................................ ................................ . 34

Table 11. Viability Metrics

................................ ................................ ................................ ........... 3 6v 

# Acronym List

CAA Clean Air Act Amendments of 1990

DOE U.S. Department of Energy

EIA Energy Information Administration

EISA 2007 Energy Independence and Security Act of 2007

EMTS EPA Moderated Transaction System

EPA Environmental Protection Agency

EPAct 2005 Energy Policy Act of 2005

GHG G reenhouse gases

PADD Petroleum Administration for Defense District

RFS Renewable Fuel Standard program

RFS1 Renewable Fuel Standard under EPAct 2005

RFS2 Renewable Fuel Standard as amended by EISA

RIN Renewable Identification Numbers

RVO Renewable Volume Obligation

SBRFA Small Business Regulatory Enforcement Fairness Act of

1996vi 

# Executive Summary

The Energy Policy Act of 2005 ( EPAct 2005) established the Renewable Fuel Standard (RFS) program under S ection 211 (o) of the Clean Air Act (CAA) mandating gasoline sold in the

United States contain a minimum amount of renewable fuel content determined on an annual production volume ba sis (original RFS program denoted as RFS1)

. The Energy Independence and Security Act of 2007 (EISA 2007) amended the original program by increasing the

renewable fuels mandate from 7.5 billion gallons to 15.2 billion gallons in 2012, and extend ing it

to 36 billion gallons of renewable fuel to be blended in 2022

. The revised program is referred to

as RFS2 1

.

EPAct 2005 exempted small refineries from compliance with the RFS from 2007 through 2010 2

. EPAct 2005, through its establishment of s ection 211(o)(9) (A)(ii) of the CAA

, require d that the

U.S. Department of Energy (DOE) conduct a study for the Administrator of the Environmental Protection Agency (EPA) assessing whether the RFS would impose a “ disproportionate economic hardship ” on small refineries, defi ned as those facilities with aggregate crude oil throughput that does not exceed 75,000 barrels per calendar day 3

. S mall refineries may face challenges complying with the RFS program. For instance small refineries may have less integration with upstream and downstream operations, providing limited access to capital.

On February 24, 2009, DOE transmitted its study with recommendations to EPA. The study concluded that the market for credits (Renewable Identification Numbers, or RIN s 4 ) was competitive, and f

ound no reason to believe that a competitive market would disproportionately disadvantage participants who purchase credits rather than generating them through blending renewable fuels into their products. Therefore, the study concluded that the exemption for small

refineries should not be extended for the RFS2

. The analysis did not evaluate the specific circumstances of each small refinery and noted that, should market conditions change, small

refineries maintain ed the right under Section 211(o)(9)( B ) of t he CAA to individually petition

EPA for an extension of their exemption

.

In October 2009, Congress directed DOE to revisit the issue of disproportionate economic hardship for small refineries and report its findings . T his study reflects the directions o f Congress to :

1 Many elements from EPAct 2005 remained intact under EISA 2007; RFS refers to those provisions that remained unchanged.

2 EPA chose to exempt small refiners, defined as refiners producing gasoline from crude oil with fewer than 1,500 employees and less th an 155,000 barrels per day crude processing capability, as well as small refineries defined in Section 211(o)(1)(K) as those facilities with aggregate crude oil throughput that does not exceed 75,000 barrels per calendar day

. Subsequently, EPA has conclud ed that it did not have the authority to extend the duration of the exemption period for all of the small refiners as defined under the original RFS rulemaking, but only those statutorily defined in EPAct 2005.

3 The DOE report only analyses the statutoril y defined small refineries.

4 RINs are marketable credits that obligated parties must register with EPA to demonstrate compliance with the RFS renewable fuel volumetric obligation requirements.vii

Seek comment from owners of small refineries on the reasons why they may believe that they would experience disproportionate economic hardship if the small refinery exemption

were not extended.

Assess RFS 2 compliance impacts on small refinery utilization rates and profitability

. Evaluate the financial ability of individual small refineries to meet RFS 2 requirements

. Estimate small refinery impacts by region.

Reassess whether small refinery compliance costs through the purchase of RINs is similar to the cost of compliance by purchasing and blending renewable fuels.

Undertak e an estimate of the economic impact of RFS 2 on small refineries on a regional

basis

.

Disproportionate economic hardship for small refine ries was characterized by increased cost of compliance to the point that the current or future viability of the refinery is impacted. In the current lower refining margin environment, the cost of RFS 2 regulations could have a material

effect on small refin ery profitability

Existing refinery specific survey data collected by Energy Information Administration alone could not provide DOE with the necessary information to make an informed decision regarding

which small refineries suffered disproportionate econo mic hardship and merited an extension of their exemptions. Instead , available public and commercial data sources were consulted and a survey of small refineries was initiated

. Before issuing this survey, conference calls were held with operators of several small refineries to ensure that the survey would acquire all of the relevant information with which to evaluate disproportionate economic hardship. The survey

was sent on September 22, 2010 to the 59 refineries that qualified for an exemption in the initial

RFS 2 program

. C ompleted surveys were received for eighteen small refineries that met the statutory requirements for inclusion in the small refinery exemption study

. Several of the refineries that were exempt from the initial R FS program under the small refinery provision are part of large integrated oil companies or large geographically diverse refiners. Some of these large refiners notified DOE that they were not going to respond to the survey because they did

not believe the y faced disproportionate economic hardship.

Small refineries c an suffer d isproportionate economic hardship from compliance with the RFS

program if blending renewable fuel into their transportation fuel or purchasing RINs increases

their cost of products r elative to competitors to the point that they are not viable , either due to loss of market share or lack of working capital to cover the costs of purchas ing RINs. Since certain small refineries may have to rely on RIN purchases instead of blending as a RF S compliance strategy, scenarios where RIN prices might be substantially higher than their

historical value or the cost of blending renewable fuels were evaluated

. P rofiles were developed of the small refineries to categorize profitability and financial health. R egional and local factors

that could affect the ability to comply with the RFS were considered in the analysis

. Through these factors, metrics were developed to evaluate whether each of the eighteen refineries that responded to the surv ey and fall within the scope of the study would suffer an economic hardship relative to an industry standard.viii

Based on the developed metrics and analysis

, thirteen of the eighteen refineries analyzed are recommended to receive an extension of their exemp tion. The refineries recommended are geographically diverse: [Redacted] . Of the five small refineries that did not receive the exemption, [Redacted]

. The refineries recommended for the exemption are:

[Redacted]ix This page intentionally left blank.1 

# I. Study Objectives

The Energy Policy Act of 2005 ( EPAct 2005) established the Renewable Fuel Standard (RFS)

program under section 211 (o) of the Clean Air Act (CAA) mandating gasoline sold in the

United States contain a minimum amount of renewable fuel content determined on an annual production volume basis. The Energy Independence and Security Act of 2007 (EISA 2007) amended the RFS program by increasing the renewable fuels mandate from 7.5 billion gallons to

15.2 billi on gallons in 2012 , and extending it to 36 billion gallons of renewable fuel to be

blended in 2022 5

.

EPAct 2005 exempted certain small refineries from compliance with the RFS from 2007 through

2010 6

. EPAct 2005, through its establishment of s ection 211(o)(9)(A)(ii) of the CAA, require d

that the U.S. Department of Energy (DOE) conduct a study for the Administrator of the Environmental Protection Agency (EPA) assessing whether RFS 2 would impose a

“ disproportionate economic hardship ” on small refineries, defined as tho se facilities with aggregate crude oil throughput that does not exceed 75,000 barrels per calendar day 7

. Based on the results of the study, EPA may be obligated to extend the RFS 1 exemption to small refineries

for at least two additional years beyond its c urrent expiration date of 2010.

On February 24, 2009, DOE transmitted its study with recommendations to EPA. The study concluded that the market for credits (Renewable Identification Numbers, or RINs) was currently competitive, and found no reason to belie ve that a competitive market would disproportionately disadvantage participants who purchase credits rather than generating them through blending renewable fuels into their products. Therefore, the study concluded that the exemption for small

refineries sh ould not be extended beyond 2010

. It was noted that, should market conditions change or if individual small refineries were experiencing economic hardship

, small refineries

maintain ed the right under Section 211(o)(9)( B ) of the CAA EPAct 2005 to individually petition

EPA for an extension of their exemption

.

Subsequent events required that the study be revisit ed . First, the economic downturn reduced the profitability of the refining industry, which has disproportionately impacted some small refin ers. Second, the expiration of the biodiesel production credit reduced production and has caused the price of biomass

- based diesel RINs to increase . Even though the credit was retroactively restored for 2010, these RINs remain relatively expensive. Finally , in order capture the unique factors

5 The EPAct 2005 RFS program is abbreviated RFS1 and the EISA 2007 revisions to the RFS1 program is abbreviated RFS2 in the rest of this document. A glossary of relevant terms is provided in Appendix A.

6 EPA chose to exempt small refiners, defined as refiners producing gasoline from crude oil with fewer than 1,500 employees and less than 155,000 barrels per day crude processing capability, as well as small refineries defined in Section 211(o)(1)(K) as those facilities with aggregate crude oil throughput that does not exceed 75,000 barrels per calendar day Subsequen tly, EPA has concluded that it did not have the authority to extend the duration of the exemption period for all of the small refiners as defined under the original RFS rulemaking , but only those statutorily defined in EPAct 2005.

7 As defined in Section 211(o)(1)(K).2

contributing to disproportionate economic hardship, additional consultation with individual refiners was necessary.

On a parallel track to the changed market conditions, Congress directed DOE to revisit the issue

of d isproportionate economic hardship for small refineries and report its findings 8 . T his study

addresses th e concerns of Congress in directing DOE to :

Seek comment s from owners of small refineries on the reasons why they may believe that they would experience disproportionate economic hardship if the small refinery exemption

were not extended. Assess RFS compliance impacts on small refinery utilization rates and profitability

. Evaluate the financial ability of individual small refineries to meet RFS requirements

. Estimate small refinery impacts by region.

Reassess whether small refinery compliance costs through the purchase of RINs is similar to the cost of compliance by purchasing and blending renewable fuels.

E stimate the economic impact of RFS on s mall refineries on a regional basis

.

Given this Congressional direction, this study needed to consider the unique factors contributing to disproportionate economic hardship for individual small refineries in the study . Consequently, a survey of small refi neries was necessary, something not included in the previous DOE study.

In order to evaluate disproportionate economic hardship caused by the impact of compliance

with the RFS on small refineries, these compliance strategies had to be characterized and the ir varying impact on refineries investigated. There is a direct cost associated with participation in the program. The RFS program is based on a national mandate for renewable fuels, enforced through obligated parties who are responsible to EPA for their p ro

- rata share of the renewable fuel mandate. However, the program incorporates a market solution to the process of fulfilling the mandates, allowing trading between the obligated parties from those who over

- comply to those who find it less advantageous to blend renewable fuels into the transportation fuel mix

. Transfer of the obligation is formally accomplished through the market for RIN s

.

The absolute cost of compliance is one of the key factors in determining disproportionate economic hardship from compli ance with RFS2. There are two major pathways that may be followed for compliance . One compliance pathway is blending renewable fuels with gasoline, which may require capital expenditures for equipment

. The second pathway is purchasing and maintaining a portfolio of RINs

. If certain small refineries must purchase RINs that are far more expensive than those that may be generated through blending, this will lead to disproportionate economic hardship for those effected entities

. Economic theory suggests that t he price of RINs

would reflect the marginal cost of compliance with the RFS, that is, the most expensive cost of

8 The Senate Report (Senate Report 111

- 45) accompanying the FY2010 Energy and Water Development Appropriations Bill included language directing DOE to re

- open the study and revisit the issue in greater detail completing the revised study by June 30, 2010. The Appropriations Bill directed DOE to collect data on small refineries and quantify the economic impact of RFS compliance. In addition, the Appropriations Conference Report (House Report 111

- 278) included language supporting the Senate Ap propriation s R eport request.3

blending renewable fuels. The average cost of compliance may be much lower than the marginal cost. If the economics of blending ethanol are f avorable, that is, ethanol is less expensive than the gasoline components it replaces, the compliance cost may be essentially zero for refiners that fulfill their obligation through blending renewable fuels . Such refiners would have blended even

without th e man d ate

. While current RIN prices for ethanol are moderate (adding less than 2 cents per gallon of renewable fuel) , there are numerous circumstances when RIN prices could rise, increasing the cost of compliance and perhaps increasing the cost of complian ce more for refineries that rely on RIN s for compliance compared to those that do not. These circumstances

include both increases i n the costs of renewable fuels and the inability to blend all of the

mandated renewable fuel in to conventional transportation fuels (the so

- called blend wall)

.

Small refineries could have particular obstacles that would make compliance more costly than

th ose of large integrated companies

. Compliance costs and characteristics of small refineries that

make them more vulnerable to financial distress may be unique to each small refinery

. Since

much of the information is not publicly available, the small refineries were surveyed to make a determination of disproportionate economic hardship. This information was supplemented by publicly available data

, which also yielded the baseline from which disproportionate economic impact may be discerned. Given the unique nature of each refinery, it is not possible to make a recommendation on any refinery that did not submit a survey.

Disproportionate economic hardship must encompass two broad components: a high cost of compliance relative to the industry average, and an effect sufficient to cause a significant impairment of the refinery operations. The individual metrics for each refin ery were grouped into two general categories: eight metrics representing disproportionate impacts on the refinery and

three metrics representing the effect of compliance on the viability of the firm

.



# II. RFS Regulation s

The first RFS regulation, referenced as RSF1 in this study , was specified in Section 1501 of

EPAct 2005. This section added paragraph 211(o) to the CAA , requiring the EPA to promulgate regulations implementing a renewable fuels program. EPAct 2005 specified that the regulations ensure a speci fied volume of renewable fuel be blended into gasoline sold in the U nited S tates each year, with the total volume increasing over time. The goals of the program include d reducing the Nation’s dependence on foreign sources of petroleum, increasing domestic sources of energy, and assisting in the transition to alternative fuels from petroleum in the transportation

sector

.

The final RFS 1 program rule was published on May 1, 2007, and the program began on September 1, 2007

. 9 RFS1 created a specific annual le vel for minimum renewable fuel use that

increases over time

– resulting in a requirement that 7.5 billion gallons of renewable fuel be blended into gasoline (for highway use only) by 2012.

9 During 2006 a n RFS was established using the default compliance criteria as specified by EPAct 2005.4

Under the RFS1 program, compliance is based on obligated parties m eeting their annual Renewable Volume Obligation (RVO) , which is published annually in the Federal Register by

EPA. Obligated parties include refiners, blenders and importers of gasoline. The RVO is expressed as a percentage of total non

- renewable gasoline sold by the obligated party in the specified calendar year. Compliance is demonstrated through the use of transferable credits

called RINs , which are assigned to each batch of renewable fuel produced. For obligated parties to show compliance, RI Ns must be acquired either by blending renewable fuel into gasoline or

diesel

, or by acquisition of RINs from other parties that have exceeded their RVO.

Provisions of EISA 2007 significantly increased the volume of renewable fuel mandated under

the RFS. The required volume of renewable transportation fuel increased from nine billion gallons in 2008 to 36 billion gallons in 2022

. 10 RFS2 also established required volumes of cellulosic biofuel, biomass

- based diesel fuel

, total advanced biofuel, and total ren ewable fuel to

be used each year. 11 As with RFS1, t he responsibility for enforcing the annual renewable fuel targets falls to EPA. In addition, the EPA is responsible for assessing domestic supply and setting appropriate percentage standards each year. Fig ure 1 compares the requirements of RFS1

and RFS2.

10 http://www.epa.gov/otaq/fuels/renewablefuels/index.htm

, accessed 12 20 2010.

11 The additional RFS2 biofuel requirements for cellulosic biofuels and biomass

- based dieel fuel are “nested” requirements within the category of “advanced biofuels.” Likewise, “advanced biofuels” is a nested requirement within the category of “total renewa ble fuels.”5

Figure 1

. Comparison of RFS1 and RFS2 Volume Requirements

Note: Bio

- mass based diesel yields 1.5 credits per gallon for the purpose of compliance with the Advanced and

Renewable Standards. Aggregate bars represent the RFS2 requirements; line represents RFS1.

Rather than a complete departure from the earlier program, RFS2 represents an evolutionary development that both expands and extends the scope of the renewable fuels agenda, while carrying over to the new standard much of the structure and terminology from RFS1

.

RFS2 expands the fuel requirements to 36 billion gallons by 2022 and also expands the fuel types from on

- road gasoline only to gasoline and diesel fuel for both on

- r oad and off

- road

and to railroad locomotive and domestic marine fuels as well.

Under RFS1, to ensure compliance, EPA devised a tracking system using RINs to meet a single RVO for renewable fuel . RFS2 retains the concept of the RVO, but expands it to

incl ude four distinct RVOs, one for each of the new types of fuel s (Cellulosic Biofuels,

Biomass

- Based Diesel, Other Advanced Biofuels, a nd Cellulosic Diesel ) resulting in four types of RINs.

EPA established a new system, the EPA

- Moderated Transaction System (EMTS)

, for the generation, trading and tracking of RINs. The effective date for RFS2 is July 1, 2010

, and the regulation applies to all renewable fuel produced on or after that date. Because of the

mid

- year start date and carry

- over ability of RINs, bo th RFS1 and RFS2 versions of RINs will be in force in 2010 and beyond.6

RFS2 changes the definition of qualified renewable fuels to include minimum lifecycle greenhouse gas (GHG) emission reduction thresholds f or each of the renewable fuel types as measured against the performance of gasoline or diesel derived from conventional production techniques. The reduction requirements must be at least:

o 60 percent for Cellulosic Biofuels (including Cellulosic Diesel)

o 50 percent for Biomass

- Based Diesel and Other Advanced Biofuels

o 20 percent for other Renewable fuels such as corn ethanol from plants built after December 19, 2007

.

The minimum GHG reduction requirements must include consideration of the complete life

cy cle of the fuel, including the pl anting, growing and harvesting of the feedstock and production and distribution of the resulting fuel . In addition, the indirect land use impacts brought about through increased use of biofuels are included

. There are als o restrictions on the types of feedstocks used to make renewable fuel and the types of land used to grow and

harvest feedstock.

RFS2 also provides for specific types of waivers and a system of credits for cellulosic and

biomass

- based diesel biofuels.



# III. RINs

How RINs Are Used to Ensure Compliance with the
Renewable Fuel Standard

For the RFS1 program , the EPA established a very specific method of tracking the production and ownership of the renewable fuels using a 38

- character RIN

. With the introduction of the

EMTS , the concept of the RIN has been retained , but modified, for the RFS2 program . The

EMTS is a central automated registry run by EPA that serves as the focal point for recording and tracking the various credits, trad es
, and the compliance of obligated parties and renewable fuel

exporters. The EMTS records the generation and transfer of RIN s, the central identifier that enables the obligated parties to demonstrate compliance, as well as track the volumes of renewable fuels. The RIN is generat ed by the producer or importer of renewable fuel and is assigned to batches of renewable fuel. The RIN is transferred with the physical volume of

ethanol , representing the gallons produced through subsequent changes of ownership.

On December 14, 2010, t he EPA issued a clarification of its earlier Final Rule implementing the RFS2 program . Although the Final Rule gave an illustration of the 38

- digit RIN code, the intention was only to use it as an example. Under RFS2 and the EMTS, RINs are not identified by a 38

- digit code

, even though most of the information continues to be entered into EMTS. The

main difference is that the “SSSSSSSS” and “EEEEEEEE” components for the batch “start” and

“end” numbers are eliminated. The 38

- digit code proved to be far to o error prone to be retained as the mechanism for recording RIN transactions . In addition, because of changes in RFS2 , there are also important differences with respect to the RR (Equivalence Value) and D codes (Renewable Fuel T ype) in the RIN.7

The Equiv alence Values (RR in Table 1) are used to determine the number of gallon

- RINs generated for a batch of renewable fuel. The intent is to reflect the specific energy content of each fuel relative to ethanol, which is defined to have an equivalence value of 1.0. The use of equivalence values in RFS2 will continue from RFS1 and non

- ester renewable diesel will be required to have a minimum lower energy value of at least 123,500 Btu/gal in order to qualify for

an equivalence value of 1.7 (see Table 1 ). In Tabl e 1 , if a company produces a 1,000 gallon batch of biodiesel, 1,000 Biomass

- Based Diesel RINs would be generated, which could be converted to 1,500 corn ethanol RINs.

Table 1 . RR Code Definitions

Renewable Fuel Equivalence Value RR Code

Ethanol 1.0 10

Biodiesel 1.5 15

Butanol 1.3 13

Non

- ester Renewable Diesel 1.7 17

The D Codes

, which identify the Renewable Fuel Category

, embody another change in the RIN

from RFS1 to RFS2 . Under RFS1

, there were only two fuel types . W ith RFS2

, there are five

codes applicable to four categories of renewable fuels: C ellulosic B iofuel

, Cellulosic Diesel,

B iomass

- B ased D iesel

, Other A dvanced B iofuel, and total renewable fuel ( see Table 2 ). D code 1 from RFS1 has been replaced with D code 3 in RFS2, and D code 2 from RFS1 has been replaced with D code 6 in RFS2 . Cellulosic biodiesel is unique in that it may qualify for either

the biomass

- based diesel mandate or the cellulosic biofuel mandate, but not both. To distinguish it from fuel that may only fulfill the biomass b ased diesel mandate, it is assigned a separate D

code of 7 , which may be considered a subset of D code 3.

Table 2

. D Code Definitions

RFS1 RFS2

D Value Meaning D Value Meaning

1 Cellulosic biomass ethanol = 3 Cellulosic B iofuel

7 Cellulosic D iesel

4 Biomass

- B ased D iesel

5 Other Advanced B iofuel

2 Renewable fuel not cellulosic

biomass ethanol = 6 Renewable F uel , corn ethanol

Currently, the marketplace is actively trading four types of RINs: Corn ethanol RINs (D6),

cellulosic ethanol RIN s (D3), biodiesel RINs (D4) and other advanced biofuels (D5, e.g., cane ethanol) . It should be noted that the market also refers to these categories of RIN s as Type C (for

Cellulosic B iofuel ), Type B (for Bio mass

- Based D iesel), Type A (for Other Advanced B iofuel ), and Type R (for Renewable F uel ). This terminology is used interchangeably with their associated D codes, e.g., Types C, B, A, R are interchangeable with D Codes 3, 4, 5, and 6, respectively.8



## Renewa ble Fuel Standard Volume Requirements and RIN

Values Obligated Parties

Obligated parties required to comply with RFS2 include domestic refiners and blenders dealing with transportation fuels. I mporters and foreign producers of transportation fuel used in the United States are also specified as obligated parties. While the scope of obligated parties has been expanded, the RFS2 program continue d to provide exemptions for small refineries (and certain small refiners) until the end of 2010 . The final RFS2 ru le became effective July 1, 2010, and the percentage standards apply to all gasoline and diesel fuel produced or imported for the full year 2010. However, RINs generated under RFS1 (including those in 2010 before the Rule became final) and certain carryov er RINs from 2008 and 2009 will be credited toward the 2010

RVO

.

For each gallon of renewable fuel produce d , a single credit ( or multiple credits in the case of an equiv alence value greater than one ) is generated. These RIN credits are then moved from o ne party to the next, as they pass through the supply chain, until they eventually find their way to an obligated party. RINs accompany the physical volume of renewable fuel until the renewable fuel is blended with petroleum, at which point it may be sepa rated from the resulting finished transportation fuel. When a RIN is separated from the physical batch of f uel

, the first digit of the

RIN is changed from a 1 to a 2. An obligated party can obtain RINs either through the purchase

and blending of renewable fuel with their petroleum product

, or
, through acquisition of separated

RINs from blenders ( those non

- obligated parties and those who have exceeded their mandated

volumes )

. Obligated parties must demonstrate compliance with the program at the end of each year by submitting a sufficient number of RIN credits to satisfy their pro

- rat a share of the overall

mandate.



## Calculation Issues

The following tables summarize the volume requirements for each main category of renewable fuel by year. The RFS2 regulations require progressively greater blending of renewable fuels each year. Table 3 shows the mandated volume for each of the categories of renewable fuel through 2022.9

Table 3 . RFS2 Annual Volumetric Requirements (Billion Gallons)

Year Conventional

Biofuels Advanced Biofuels Total
Conventional &

Advanced

Renewable Fuel Cellulosic

Biofuel Biomass

Based Diesel Other Advanced

Biofuel to

Balance Total

Advanced
Biofuel

2009 10.5 0.5 0.1 0.6 11.1

2010 12 0.1 0.65 0.2 0.95 12.95

2010a 12 0.0065 1.15* 0.95** 12.95

2011 12.6 0. 006 0.8 0. 1 1.35 13.95

2012 13.2 0.5 1 0.0 2 15.2

2013 13.8 1 ≥1.0 0. 2 5 2.75 16.55

2014 14.4 1.75 ≥1.0 0.5 3.75 18.15

2015 15 3 ≥1.0 1. 0 5.5 20.5

2016 15 4.25 ≥1.0 1.5 7.25 22.25

2017 15 5.5 ≥1.0 2. 0 9 24

2018 15 7 ≥1.0 2.5 11 26

2019 15 8.5 ≥1.0 3. 0 13 28

2020 15 10.5 ≥1.0 3. 0 15 30

2021 15 13.5 ≥1.0 3. 0 18 33

2022 15 16 ≥1.0 3.5 21 36

* Combined 2009/2010 Biomass

- Based Diesel volumes applied in 2010

** While Biomass

- Based Diesel volume was increased to 1.15 billion gallons, Total Advanced Biofuels remained at 0.95 billion gallons for 2010.

Sources: EISA 2007, Public Law 110

- 140, pages 1522

- 1523 as amended by EPA 40 CFR Part 80 Regulation of Fuels and Fuel Additives: Changes to Renewable Fuel Standard Program; Final Rule publ ished March 26, 2010.

Each year, EPA uses these volumes and the U.S. Energy Information Administration ( EIA ) estimate of transportation fuel demand for the next year to derive the RVO percentage for each biofuel type. These derived values for 2011 are shown in Table 4. The biofuel percentage multiplied by the actual volume of petroleum fuel imported or produced by the obligated party determines the number of RINs of each type t hat must be surrendered to EPA to meet the RFS2 requirements.

Table 4 . Standards for 2011

Fuel Category % of Fuel Required

to be Renewable Volume of Renewable Fuel (Billion Gallons)

Cellulosic biofuels 0.003% 0.0066

Biomass

- based diesel 0.69 0 % 0.80

Total Advanced biofuels 0.78 0 % 1.35

Renewable fuel 8.01 0 % 13.95

Source: Federal Register Vol. 75, No. 236 Thursday, December 9, 2010 pg 7679310

One of the possible sources of confusion with RFS2 is the way the RVO percentage requirements are calculated. Under RFS1, the percentage requirements applied only to one

biofuel standard. 12 The correct interpretation

, due to the “nesting concept

, ” is that the total RVO percentage is 8. 01 0 percent. The other (incorrect) interpretation is that the total RVO percenta ge is 9. 483 percent, derived from the sum of 0.00 3

, 0.69 , 0. 7 8 and 8. 01 percent.

EPA has the authority to adjust the mandated volume for C ellulosic Biofuel, B iomass

- B ased

Diesel and, if necessary, for T otal A dvanced B iofuel if it appears there will be a s hortfall in supply. As part of the RFS2 final rule, EPA reduced the 2010 C ellulosic B iofuel mandate from 100 million gallons to 6.5 million ethanol

- equivalent gallons. Each year during the summer

, EPA is required to announce in the Federal Register the pr oposed r equirements for the following

year . EPA must publish the final rule for the following year volumetric requirements by

November 30 13

.



## The Value of RINs

Until mid

- 2010, the RIN market was almost exclusively corn ethanol from the RFS1 program

. Since then, the RIN market expanded to include t hree advanced biofuels : c ellulosic ethanol

, biodiesel and can e ethanol . Today, there are four types of RIN s traded : corn ethanol, ce llulosic ethanol, biodiesel and advanced (usually sugar cane) ethanol

.

D epending upon the relative price of gasoline and corn ethanol, blending corn ethanol may be economically attractive aside from the mandate. If so, the price of corn ethanol RINs will reflect

their transaction costs. As the economics become less favorable f or corn ethanol, blending

decreases and the amount of corn ethanol consumed is reduced. Once the corn ethanol consumption starts to fall below the mandated level, RIN prices will rise. In equilibrium, RIN prices will rise to increase demand for corn ethano l to the mandated level.

Figure 2 shows the history of RIN prices since program inception and illustrates the significant challenges faced by the biodiesel and cellulosic ethanol segments. B iodiesel and cellulosic RINs

have trad ed at a substantial premium to corn ethanol RINs. This is a result of supply

- side pressures associated with the limited production of biodiesel and cellulosic ethanol compared to

corn ethanol

. Biodiesel RIN s have continued their upward trajectory, reaching over $1.10 per

RIN in March, 2011. Renewable RIN s have remained at historically low levels of $0.02

- $0.03 per RIN through February, 2011

12 RFS1 specified different compliance values for certain types of biofuels (e.g., a gallon of biodiesel fuel had a higher compliance value than ethanol). These compliance values would be used to calculate an obligated party’s compliance volum e but that volume would only be measured against one RVO.

13 More information on RIN market operations and compliance costs may be found in Appendix B.11

Figure 2. Historical Renewable and Biodiesel RIN Prices

Source: OPIS for 04/02/2008

- 08/09/2010.

A pproximately 75 to 80 percent of all U.S. biodiesel production capacity is currently idle due to the high cost of raw material s (soy bean oil, other vegetable oil s , fats, and greases) relative to the value of the recipient petroleum diesel. Through December 2009, the biodiesel indust ry was supported by a federal tax credit of $1.00 per gallon for virgin feedstocks, and to a lesser extent, a European import tax credit that provided a market for biodiesel exports to Europe. While the biodiesel credit was reinstated retroactively at the end of 2010, its impact on supply has not yet

been felt.

Cellulosic RINs are expensive because of the lack of Cellulosic Biofuel production. The technology for cellulosic ethanol production is still in the development stage and could be several years fr om commercial

- scale production

. If EPA determines that insufficient cellulosic production capacity exists, it may lower the cellulosic mandate and offer cellulosic RINs up to the total revised mandated level at a statutory price. In 2010 and 2011

, EPA lowe red the mandate

for cellulosic ethanol to 6.5 and 6. 6 million ethanol

- equivalent gallons

, respectively. The price was set at $1.56 per RIN for 2010 and $1.13 for 2011.

RINs have a two

- year shelf life: the current year (year generated) and the subsequent ye ar. Twenty percent of current

- year RINs can be carried over to the subsequent year. For the last several years

, there has been a large discount of previous

- year RINs versus current

- year RINs

because of the success in the overall satisfaction of the current

- year RVO. Figure 3 illustrates

the relative values of current

- year and previous

- year RINs since inception

.12

Figure 3. Carry

- Over and Current

- Year RIN Prices

Source: OPIS for 04/02/2008

- 08/09/2010

.

Ethanol serve s to displace other blending components of gasoline. When ethanol is expensive, higher RIN prices provide an incentiv e for blenders to continue to use ethanol up to the statutorily

- mandated level. Historically, there has been a close correlation between th e value of

corn ethanol RINs and the price of corn ethanol relative to gasoline

. Figure 4 compares corn ethanol RIN prices with the corn ethanol

- versus

- RBOB 14 price spread for four major U

. S

. petroleum product markets; NY Harbor, US Gulf Coast, US West Coast (LA) and Chicago

. W hen corn ethanol prices are high relative to gasoline

, corn ethanol RIN prices also tend to be high. When corn ethanol prices are low relative to gasoline

, corn ethanol RIN prices tend to be low as well. For most of 2010, corn ethanol traded at price s below the price of gasoline, creating

a substantial financial incentive for corn ethanol blending. As a result, as of February, 2011 corn ethanol RIN prices are still at historic lows, hovering around $0.02

- $0.03 /gallon.

O bligated parties typically keep close track of their RIN balances, estimating whether they will be long or short at the end of each quarterly reporting period. Manufacturing upsets, shifts in gasoline b lending and changes to the supply/demand balance for products can cause unexpected changes to a company’s RFS compliance. G enerally accepted accounting principles require a company to accrue a liability on its books at the end of a financial quarter when they are in a short position and need to purchase RINs.

14 Reformulated blending oxygenated blendstock13

Figure 4. RINs Prices Track the Ethanol

- RBOB Spread

Source: Derived from OPIS, Refined Spot Prices for 04/02/2008

- 08/09/2010.

As shown in Figure 4 , there were occasional end

- of

- quarter spikes of RINs which were likely caused by the mandated quarterly settlement and reporting process. Firms unable to meet their obligation need ed to “pay up

, ” thus causing the apparent lag in RIN prices

. T he RIN market lag

appears to be about two months.



# IV. The B lend Wall

There has been considerable discussion among industry and government policy makers about the looming “blend wall” and the impact this blend wall will have on ethanol producers, refiners and blenders, and, in particular, small refiners. There also has been concern about the how the blend wall will impact the industry’s ability to comply with RFS2, specifically to meet the renewable fuel volumes mandated by EISA 2007

.

A blend wall is the aggregate limi t to which a renewable fuel can be blended into its recipient

motor fuel

. The blend wall reflects both physical limitations and regulatory restrictions on the ability of the vehicle/fuel system to absorb renewable fuels. As a result, a blend wall is specific to a particular renewable fuel and specific to a particular motor fuel. The re are two primary14

blend walls of concern: one encompasses ethanol blending in motor gasoline and another blend

wall exists for biodiesel blends in diesel fuel

. Since the latter mandate is so much smaller than the former, th e ethanol blend wall is of the most concern.

Implementation of ethanol blending requires changes in infrastructure and regulations. At times, the ethanol production capacity has exceeded the market’s ability to profitably execute ethano l blending, causing periods when the blend wall actively constrains the market . Continued

infrastructure build

- out has expanded the fraction of gasoline containing ethanol. However, EIA data has shown that ethanol blending has expanded to almost the entire gasoline pool. At this point, the blend wall cannot be alleviated through increased low

- level blends such as E10 alone.

The blend wall is a function of a multitude of contributing factors occurring together or singly. Each of these factors plays a part in determining the maximum amount of ethanol blended into gasoline

, and thus, each contributes to the timing of when the blend wall could be reached.



## Contributing Factors to Reaching the Blend Wall

The timing of when the blend wall occurs is a function of many contributing factors

, including:

1. Motor fuel demand

. Ethanol is one of many components of gasoline. With minor exceptions, gasoline is either “neat” ( without ethanol ) or blended at a fixed proportion to gasoline. Therefore, the overall consumption of ethanol is proportional to demand for gasoline. Since the demand for gasoline is relatively inelastic relative to price, and ethanol has very little impact on the price of gasoline, overall consumption is directly

prop ortional to the demand. Exogenous factors such as unemployment, fuel economy standards and the price of oil play an important role in the ability of the transportation fuel pool to absorb ethanol.

2. Federal, State and Local regulations/mandates/incentives

. Not all gasoline contains

ethanol. Numerous incentives exist for the production and consumption of ethanol . At the national level, these include the Volumetric Eth anol Excise Tax Credit (VEETC) and the small ethanol producer’s credit. Furthermore, numerous s tates have incentives and mandates for renewable fuels. California has a requirement for 10 percent ethanol in gasoline. Such incentives have encouraged infrastructure changes accelerating blending in almost all available gasoline pools.

Federal and Stat e regulations have a significant impact on ethanol blending penetration and economics. Under Title I, the CAA puts the regulatory burden of compliance for criteria pollutants on the States, which develop regulations based on their local

conditions. Because any change in the proportion of components of gasoline will have a significant impact on vehicle emissions, States must develop such strategies including ethanol blending limits in conjunction with EPA. The limit on blending has increased as

more states h ave incorporated ethanol in their compliance strategies.

Biodiesel represents an alternative renewable fuel that does not impact the ethanol blend wall. Currently biodiesel receives a $1 per gallon tax incentive. Both Pennsylvania and15

Minnesota have mandat es for biodiesel consumption

. Even with these incentives, biodiesel production costs are so high and acceptance so low that it is unlikely to be consumed in any greater than the minimum volume mandated by EISA 2007

.

3. Mid

- level blends. If ethanol concentrat ions greater than 10 percent are allowed, this will

increase the total quantity of ethanol consumed in transportation fuel and will raise the effective blend wall. However, there are numerous regulatory and logistical hurdles that

must be overcome before t he use of mid

- level blends becomes widespread. Implications

of mid

- level blends are discussed in the section “E15 and the Blend Wall” on page 1 8

.

4. E85 infrastructure

. E85 is a mixture of approximately 85 percent ethanol and 15 percent gasoline. E85 use requires specialized (flex

- fuel) vehicles. E85 does provide another outlet for ethanol. However, given the small number of flex

- fuel vehicles currently in use, about 7.3 million according to EPA estimates, the opportunity to increase the blend wall through increased use of E85 is limited. In addition, the E85 delivery system is not well developed. Industry observers have estimated that there are currently only about 2,000 E85 pumps in the US. For the E85 market to absorb significant additional quantities of ethanol, massive demand growth supported by infrastructure improvements would be

necessary 15

.

E85 is a complement rather than a replacement for conventional fuels for flex

- fuel vehicles. As such it must compete effectively on a per

- mile basis. Therefore , ethanol must be sold at its energy content value, which is roughly 2/3 of that of gasoline.

These factors are summarized in Table 5 below.

Table 5 : Blend Wall Contributing Factors

15 EPA

- 420

- R

- 10

- 006 , “ Renewable Fuel Standard Program (RFS2 ) Regulatory Impact Analysis ”, February 201016



## How Close is the Blend Wall

Some ethanol industry trade organizations have stated that the blend wall has already been reached because ethanol production has at times exceeded 10 percent of gasoline consumption. This percentage is often used as a proxy for the total amount of ethanol that can be blended into gasoline because 10 percent is the federally

- mandated maximum ethanol content of gasoline consumed in National Ambient Air Quality non

- attainment areas as defined in the CAA. 16

EIA stated in July 2010 that while they were projecti ng that daily ethanol supply would briefly

exceed 10 percent of daily motor gasoline demand in early 2011, they were also projecting that increasing daily demand of gasoline over the balance of the year would absorb the full year ethanol production. EIA’s statement makes an important point about the blend wall: the volume associated with the blend wall is more accurately discussed as an annual volume rather than a monthly volume.

Figure 5 shows EIA’s projection of the compliance pathway for the RFS2 progra m through

2022

. The line reflects the maximum amount of ethanol that may be blended into gasoline as E10. Any volumes above the line must be a high

- level blend such as E85, or a non

- ethanol renewable fuel. The difference between the yellow bar and the line represents the level of corn ethanol alone that cannot be absorbed into the transportation fuel pool. The physical limit to ethanol blending could be reached in 2012. However, RFS2 does not explicitly mandate an RVO greater than this physical limit until 2014, when the RVO is over 16 billion gallons of

ethanol.

A surplus inventory of RINs could delay the date when the RVO cannot be met if the physical blending limit has been reached. While RINs are generate by blending renewable fuel, surplus

RINs from one year may be carried over for use in the compliance in the next. Based on consumption of ethanol over the last few years, it is estimate that approximately 1

– 2 billion

RINs may be available. Such carryover RINs may influence the timing of when the bl end is

reached.

16 It is important to note, however, that 10 percent of gasoline demand is only a theoretical blend wall value and as a result provides only an estimate of the volume associated with the corn ethanol blend wall. Ten percent is a blend limit only in the absence of ethanol feedstock shortages, changes to federal regulations, imports/exports or a larger

market for E15/E85

, etc.17

Figure 5

. RFS2 and U.S. Motor Gasoline Demand

Source: EIA data as of 9/6/10.

Note: These calculations do not reflect the recent EPA decision to grant a partial waiver for E15 use in

MY2001

- 2006 vehicles on January 21, 2011 and MY2007

- Cu rrent vehicles on October 13, 2010



## Consequences of Reaching the Blend Wall

When the blend wall is reached, there could be significant economic consequences for obligated parties such as refiners and ethanol suppliers. T here will also likely be down ward pressure on ethanol prices given that ethanol production capacity is still increasing while the ability to incorporate ethanol in the transportation fuel system is constrained . This may have a negative impact on ethanol producers.

As the blending opportuni ties become scarce, more expensive blending opportunities will be pursued. Current options include an increase in biodiesel and an increase in consumption of mid

or high

- level ethanol blends. However, biodiesel is limited by limited feedstock supply, high production costs and limited market acceptance. Mid

- and high

- level ethanol blends

, such as

E15 and E85

, face current physical limits on distribution and vehicles that can use the fuel in additional to other market acceptance factors. T hese actions provi de limited additional blending opportunities in the near term.

RIN prices should rise to reflect the most expensive blending opportunity taken. As the RFS mandate increases, obligated parties will demand more RINs, adding upward price pressure. As18

the mand ate increases

, increasing the supply of RINs becomes difficult or nearly impossible. In anticipation of the blend wall, obligated parties may stockpile RINs through discretionary blending in anticipation of a shortage of blending opportunities. Those parti es that are short, i.e. cannot generate enough RINs through their own facilities to meet their RVO, will need to purchase RINs and could suffer significant economic hardship.

D eclining ethanol prices would probably be favorable to refiner s /blenders that pr edominately blend ethanol rather than purchase RINs for blending

. Many small refiners do not retain control over the blending of their products, and must purchase additional RINs. O bligated parties that rely on purchasing RINs would be adversely affected when the blend wall is reached and the ir

RIN s inventory has been depleted.

The next section investigate s the impact of the approaching blend wall on RIN prices through an econometric relationship developed between discretionary blending

, corn ethanol prices and RIN prices

.



## E15 and the Blend Wall

On October 13 , 2010 EPA granted a waiver for fuels containing up to 15 percent ethanol for vehicles of Model Year 2007 and later. On January 21 , 2011 this waiver was extended to Model

Years 2001

– 2006 vehicles. This waiver covers approximately 2/3 of the light duty vehicle fleet. While it may appear that these E15 waivers substantially increased the amount of ethanol that could be blended into gasoline before the blend wall is approached , there are several reasons why this may not be the case. In particular, there are numerous obstacles to overcome before E15 blends become viable in the marketplace.

Current pumps are not certified for blends above 10% ethanol. While it is likely that E15

would not harm conventional pumps, liability concerns would no doubt limit the distribution of the new fuel. Replacing pumps would cost anywhere from $750 per pump if only the hanging hardware needs replacing up to approximately $11,000 per pump if interior comp onents also need to be replaced 17

. Many refueling stations have only two tanks for gasoline, usually one for premium and

one for regular gasoline. Mid

- grade gasoline is a blend from each tank. Gasoline stations could be unwilling to switch to a fuel that only a portion of their customer base would be able to purchase.

While EPA has certified the mid

- level blends

, automobile manufacturers have not

followed suit by expl icitly modifying their warranties to include E15 . It is unclear whether consumers would purchase a fuel that is not covered by their vehicle manufacturer’s warranty. Various regulatory requirements would need to be adjusted. For instance, conventional

gaso line that is sold as E10 is currently granted a 1

- lb waiver on its summer Reid Vapor Pressure (RVP) specification. Either a new rulemaking would be required for E15 or

17 EPA

- 420

- R

- 10

- 006 , “ Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis ”, F ebruary 2010, pg

800.19

refiners would have to develop a special low RVP blendstock. Similarly, EPA has develop ed specifications for Reformulated Gasoline (RFG) , a clean

- burning fuel required to be used by certain areas under the Clean Air Act. The RFG specification would also need to be changed in order to accommodate ethanol blending over ten percent

. Changes

for both conventional and reformulated gasoline would require a new EPA rulemaking, which would necessarily take anywhere from months to over a year.

For all of the above reasons, it is unlikely that E15 will play a significant role in the transportation fuel market over the next few years. Therefore, this analysis did not analyz e the impact of E15 on the gasoline and ethanol markets.



# V. Evaluating the RIN and Ethanol Markets

A simultaneous multi

- equation model of the ethanol fuels market was developed to evaluate how precipitation, crude oil prices and the RFS requirements affect corn and ethanol prices, RIN prices and the overall market equilibrium for ethanol. Appendix C describes the model structure, data and parameters, and provides a detailed analy sis of the scenarios discussed below.

T he model was used to identify conditions conducive to generating high corn ethanol RIN prices, such as drought or flooding, or increased discretionary blending of corn ethanol by obligated parties in order to stockpil e RINs against potential shortages due to the blend wall

. Scenarios were developed for 2011 and 2012, where the model derived ethanol demand and corn, ethanol, and gasoline prices using assumed values for crude oil, rainfall and the mandated level of ethan ol consumption . Under optimal rainfall conditions and crude oil prices of $90

- $92 per barrel, corn ethanol production will exceed the mandated levels in 2011 and 2012, and the ethanol is expected to be blended into the motor gasoline pool so that the numb er of RINs generated will likely exceed the RVO. Therefore, in the case where blending is economic, in a competitive

market the price of corn ethanol RINs should reflect no more than their transaction cost.
However, it is possible that obligated parties may increase blending relative to the mandated RFS level in anticipation of a shortage of blending opportunities due to the approaching blend wall. If market and meteorological conditions worsen, the combination of higher corn ethanol production

costs and increased blendi ng would likely lead to a sharp in crease in RIN prices. Several such

scenarios are explored below.

The f our scenarios described in Table 6 were used to project RIN prices (shown in Table 7) in

2011 and 2012 for varying meteorological condi tions, crude oil prices, and obligated party blending levels of corn ethanol

. 18 Scenario A represents a “Best Case Scenario” where optimal rainfall creates conditions for low ethanol price s due to a high corn yield. Scenario B dampens the expectations of a high corn yield by introducing poor rainfall conditions, which causes corn prices to increase and corn ethanol production to drop below mandated levels. In contrast,

scenario C forces bl ending up to the RVO, which causes corn ethanol RIN prices to reach $0. 38 and $0. 64 per gallon of corn ethanol blended in 2011 and 2012, respectively. RIN prices

18 Full description of the model can be found in Appendix C.20

increase to $0. 92 and $0. 95 in 2011 and 2012 under Scenario D due to over

- blending by the

obl igated parties (under poor rainfall conditions).

Table 6 . RIN Scenarios Description

Scenario Precipitation

(Inches/Month) Blending Level

A Optimal (2.91) Unconstrained

B Poor Rainfall (2.07) Unconstrained

C Poor Rainfall (2.07) Constrained (12.6 in 2011 and 13.2 in 2012 )

D Poor Rainfall (2.07) Constrained ( 13.2 in 2011 and 13.6 in 2012)

Table 7

. RIN Price Scenario Results for 2011 and 2012 (2009 $)

19 EIA AEO2011RainfallVEETCRINPriceEthanolMandateMogasUse19Crude OilPriceEthanolProductionEthanol %in MoGasEthanolPriceCorn PriceWholesaleGasolinePriceInches/Month$/Gallon$/GallonBillionGallons/YearBillionGallons/Year$/BarrelBillionGallons/YearPercent$/Gallon$/Bushel$/Gallon

2011

A 2.91 $0. 44 $0.00 12.6 139.3 90 13. 57 9. 7 % $2. 94 $4. 40 $2. 60

B 2.07 $0. 44 $0.00 12.6 139.3 90 12. 17 8. 7 % $3. 58 $6. 83 $2. 73

C 2.07 $0. 44 $0. 38 12.6 139.3 90 12.60 9.0% $3. 75 $6. 95 $2. 76

D 2.07 $0. 44 $0. 92 12.6 139.3 90 13.23 9.5% $ 4.02 $ 7.12 $2. 80

2012

A 2.91 $0. 43 $0.00 13.2 143.0 92 14. 02 9.8 % $ 3.05 $4. 42 $2. 61

B 2.07 $0. 43 $0.00 13.2 143.0 92 12. 46 8.7 % $3. 69 $6. 87 $2. 73

C 2.07 $0. 43 $0. 64 13.2 143.0 92 13.20 9.2% $ 4.00 $ 7.08 $2. 78

D 2.07 $0. 43 $0. 95 13.2 143. 3 92 13.59 9.5% $ 4.14 $ 7.18 $2. 8021

The scenarios considered are indicative of the types of events that could cause a significant increase in RIN prices, but are not designed to be exhaustive. For instance, a continued draw on

U.S. corn reserves due to for eign demand would have a similar effect of a domestic reduction in production. The point of these scenarios is to demonstrate that relatively minor changes could dramatically raise the RIN prices from their current level. Such a scenario would have a sign ificant impact on any small refinery that either physically did not blend or was not contractually obligated to receive the RINs generated when the purchaser blended the fuel.



# VI. Determining Compliance Cost

Compliance cost information was compiled through int erviews with several industry participants, including two refiners, three importers, a fuel marketer, and a corn ethanol

marketer. Generally, companies who incur an RFS2 compliance cost are obligated parties who must buy RINs to meet their RVO

, instead of blending renewable fuels

. Many companies identify blending as a profit opportunity, as historically the price of gasoline of has generally

exceeded that of ethanol. The se companies reported that the market for RINs has thus far been liquid , implying that RINs are generally available for purchase and no single participant is setting prices

. O bligated parties who could do so generally blended corn ethanol beyond their

RVO because corn ethanol was inexpensive relative to BOB (Blendstock for Oxygenate Blending) prices up until August 2010. Blending corn ethanol beyond their RVO creates surplus RINs, which in mid

- September 2010 sold for around $0.0 4 per gallon

. Biodiesel RINs have thus

far been available, although have been a n order of magnitude more expensive, at about $0.0 5 per gallon 20

. RIN sellers also include some blenders who do not have an RVO because they are typically gasoline marketers who buy ethanol and gasoline for blending and final sale

.

Obligated parties have a weighted average RIN obligation based on the percentages of the four types of renewable fuels. At current prices, this obligation is about 0.85 cents per gallon for each gallon produced or imported that is not blended with renewable fuel. Table 8 shows a sample

calculation where the production volume is 1 million gallons and RINs are priced at mid

September 2010 market values

.

Table 8 . Sample Obligated Party RINs Costs for 2010

Source: SAIC Analysis, EPA

20 As of February, biodiesel RINs, have continued to climb in price, currently well over $1 per gallon.22

Other observations from the interview process revealed:

S ome of the companies were incorrectly calculating their RVO. S ome firms reported

calculations that resulted in costs about one

- third higher than shown in Table 8

.

Interview participants generally could identify the administrative cost of compl ying with RFS2 in terms of Full Time Equivalent (FTE) personnel. The highest administrative burden reported was 1.5 FTE. One firm had automated its administrative costs and was unable to break out the compliance costs.

For the capital costs for complian ce, the data was somewhat limited. One refiner reported costs of $200,000 to $1,000,000 to modify its terminals for ethanol blending. The range was a result of whether the terminal had a tank that could be converted to ethanol storage. One marketer repo rted costs of $3,000,000 to convert its three

- lane truck rack to ethanol blending. The other participants either d id not blend renewables or use d

third

- party logistics service providers who made the required capital investments. EPA

has estimated that add ing ethanol blending and truck unloading facilities at a terminal

costs approximately $800 thousand

. 21

In most states, b iodiesel blending is limited because biodiesel feedstock is expensive and

consumer resistance to the blend exists

. Five States have bio diesel mandates: Louisiana, Massachusetts, Minnesota, Oregon , and Pennsylvania, which encourage biodiesel consumption 22

. The vast majority of biodiesel production occurs in the Midwest, where

blendin g creates biodiesel RINs which may be purchased throughout the U.S. Several participants stated that future market conditions were highly uncertain due to the expiration of the biodiesel tax credit. With the renewal of the biodiesel tax credit through

2011 23

, this is no longer an issue , though biodiesel RIN prices are still over $1.00 per gallon. For those refineries that intend to blend biodiesel, EPA has estimated adding biodiesel blending capability at approximately $500 thousand per terminal 24 . This includes blending equipment and ancillary piping an d other modifications.

A 50 ,000 barrel per day refinery that produces about 36 ,000 barrel per day of gasoline

and diesel incurs a one cent per gallon RINs purchase cost which equals approximately a $5. 5 million annually. Much of this cost may be seen a s a reduction in that refinery’s annual pretax profitability

. However, since all firms without exemptions must comply

with the RFS 2 progam , product prices should rise to reflect the additional costs. The

21 EPA

- 420

- R

- 10

- 006

, “ Renewable Fuel Standard Program (RFS2 ) Regulatory Impact Analysis ”, February 2010, pg

775.

22 “Alternative Fuels and Advanced Vehicle Data Center”, http://www.afdc.energy.gov/afdc/laws/ accessed March
8, 2011.

23 The Tax Relief, Unemployment In surance Reauthorization, and Job Creation Act of 2010 (Pub.L. 111

- 312, H.R.

4853 ) retroactively extended the biodiesel tax credit through 2011.

24 Ibid, pg. 797.23

degree to which the costs burdening small refineries will be passed through to the market depends on many factors, including the market power and the relative cost level of a small refiner relative to other market participants. Therefore, in th e current lower refining margin environment, the cost of the RFS 2 regulations could have a material

effect on small refinery profitability.

The response to the RFS2 requirements depends in large measure on the size and scope of the operations of individual companies. Larger refiner s have options available on a

scale well beyond those available to smaller refiners. Large integrated refiners can more easily obtain financing for blending facilities , generate options

, accommodate their needs efficiently and shift emphasis from one sector to another as o pportunities indicate. For example, over the past couple of years, compliance strategies for larger companies

included e ngag ing in joint ventures with ethanol producer s, investing in companies in the renewable sector, or conducting research on renewable fuels . As a r esult, RFS2 compliance costs for the larger refiner may be a small part of overall operating costs.

S mall companies are more limited in their options. They face a number of challenges and access to capital is generally limited or not available. Even whe n capital is available

, the y may have to choose between making substantial investments in blending and investing in other needed facilities to improve operating efficiencies to remain competitive.

The cost for small refiners to comply with the RFS2 requ irements can be substantial

. Costs associated with consultants and attorneys to ensure compliance, and joining

RINStar or similar services can be burdensome. Their limited product slates coupled with an inability to blend renewable fuels means that many of the small refiners must

enter the market to buy RINs . The cost to meet their individual RVO makes this aspect the most significant cost of compliance

.



# VII. Refinery Classification

The oil industry encompasses a broad spectrum of companies

. At one extreme , the multi

national super majors have full vertical integrat ion . Their operations encompass upstream (exploration, developme nt, and production), midstream ( transportation and refining)

, and downstream ( refining, marketing, distribution, and sales). Some integrated companies also operate on a world

- wide basis but tend to concentrate their refining and marketing operations in the United States. These integrated refiners also enjoy economies of scale from ownership of upstream operations, large refining ope rations

, and interests in the refined product distribution supply chain.

All i ndependent r efiners that process crude oil domestically do not directly engage in upstream operations , but some do own pipelines and storage facilities . Although large independent

refiners do not extract or produce crude oil, some participate in joint ventures involving24

integrated refiners and/or crude oil suppliers (for example Motiva

, 25 WRB Refining 26 ). Consequently, some large independent refiners are indirectly linked to the diversified operations

of their owners and can benefit from the ir vertical integration (exploration, refining, and distribution).

S mall refiners operate with limited access to resources under constrained market conditions , and

c omprise a heterogeneous group of businesses . They may be classified as :

A subsidiary of a large integrated corporation with both upstream and downstream activities

, A company o wning one or more small refineries with other lines of business contributing sig nificantly to their total operations , or
A company with a single small refinery which provides the vast majority of the value of the enterprise

.



## Refiner

- Blender Integration

Some larger oil refiners have started integrating ethanol manufacturing with their existing operations

. This action has the effect of reducing their feedstock availability risk and of capturing some of the profitability of renewable fuels production. Du ring the recent economic downturn, several ethanol manufacturers went bankrupt and some oil refiners were able to purchase distressed ethanol facilities at low prices. Currently, major oil refiners control about 7
percent of the U.S. ethanol capacity.

Valero has acquir ed a number of ethanol plants and initiated construction of others, at least one

of which is co

- located at a refinery. Valero enter ed into ethanol production in 2008 when they started buying ethanol facilities from VeraSun. They now own ten facilities with a renewable production capacity of 1.1 b illion gallons per year

. Sunoco and Flint Hills Resources also entered into ethanol manufacturing. Sunoco purchased a bankrupt ethanol plant in Fulton, NY,

located near their No r theast r efineries. It is reported t hat the plant will meet about 20 percent of the company’s ethanol needs. Flint Hills Resources purchased two facilities from Hawkeye Energy Holdings, in Menlo and Shell Rock, IA. The ethanol facilities are located near a Flint Hills refinery.



# VIII. Small R efin ery E xemption

In preparation for the RFS1 rulemaking, EPA convened a Small Business Impact (SBRFA) panel to examine the impact of the RFS1 program on small businesses. Subsequent to the discussions of the SBRFA panel, EPA chose to exempt small refiners wit h fewer than 1,500 employees and less than 155,000 barrels per day crude processing capability from compliance with the RFS1

25 Motiva is a joint venture of Shell and Saudi Aramco

26 WRB Refining is a joint venture of Conoco and Cenovus25

program . S mall refineries

, as defined above, were also exempted from the RFS1 mandate through 2010. EPA concluded that it did not have the authority to extend the duration of the exemption period from RFS1 for small refiners

. 27

In addition to the general regulatory flexibility for small business inherent in the Clean Air Act, Congress specifically addressed the potential for an extension of the small refinery exemption in EPAct 2005. Under section 211(o)(9)(A)(ii) of the CAA, the Secretary of DOE is required to conduct a study for the EPA Administrator to determine whether compliance with the RFS2

program would impose a “disproportionate economic hardship” on small refineries, as defined as

those facilities with production capacit ies under 75,000 barrels per calendar day. If the study found that disproportionate economic hardship would occur, EPA is obligated to extend the exemption to the RFS2 program for at least two additional years. In addition, small refiners and

small refiner ies still maintained the right to petition EPA for individual exemption from the

program.

As required by EPAct 2005 , the final RFS1 regulations exempted gasoline produced by small refineries from the renewable fuels standard through December 31, 2010. Si nce EISA 2007 did not alter that exemption in any way, EPA retained the small refinery temporary exemption in the RFS2 final rule without change (except for the fact that all transportation fuel produced by small refineries will be exempt, as EISA 2007 als o covers diesel and non

- road fuels). The RFS1 final

rule also offered a temporary exemption to small refiners to allow the few small refiners who owned refineries larger than the statutory limit to also receive the exemption. Similarly, the

RFS2 rule con tinued the small refiner temporary exemption for transportation fuel produced by small refiners through December 31, 2010. 28

Small refineries and small refiners may also apply for an extension of the temporary exemption, based upon disproportionate economi c hardship, on a case

- by

- case basis. Any small refinery or small refiner may apply at any time. In evaluating applications for this hardship provision, EPA

will take into consideration information from this report, annual reports, RIN system progress upda tes, petitioner s and consultatio n s with the DOE.



# IX. PI

- 588 Survey

Existing survey data collected by EIA was insufficient to determine which small refineries

merited an extension of their RFS 1 exemptions. The data collected by EIA is mostly volumetric

information regarding production , inputs, imports, and stocks. Some retail and wholesale price data are gathered, but not for the specific renewable

- based transportation fuels. Collection of ethanol is evolving, but there are still some limitations on th e coverage. Financial data are gathered annually for major refiners only. Consequently, a new data source was needed if the

27 “Final Report of the Small Business Advocacy Review Panel on EPA’s Planned Proposed Rule Regulation of Fuels and Fuel Additives: Renewable Fuel Standard Program

, ” September 5, 2008.

28 EPA Compliance Guide 4

- 126

Congressional requirements for a revised Small Refiner Exemption Study were to be met

. The

PI

- 588 survey was developed over the su mmer of 2010 to acquire the needed data. After public review in the Federal Register, the survey received clearance from the Office of Management and Budget on September 22, 2010.

This one

- time, voluntary survey was distributed electronically on Septemb er 27, 2010, to 59

refineries. It contained five parts:

Respondent Identification

Submission/Resubmission Financial Health of Refinery Market Compliance

Market Issues

Many of the questions sought three years of data (2007, 2008, and 2009). Future

- looking questions sought data for three prospective years (2010, 2011, and 2012). The cover letter, survey form, survey instructions, and electronic filing instructions are provided in Appendix D

.

The 59 refineries were selected because they currently hold a wai ver from EPA under the RFS2

program . These refineries are geographically diverse (see Figure 6 ) and represent various company sizes and structures. They include :
[Redacted]

Figure 6. Small Refineries Receiving the PI

- 588 Survey

[Redacted]

[Redacted] of the refineries currently holding waivers belong to [Redacted] major refiners Two refiners, [Redacted]

, r e sponded by declining to participate in the survey ; stating that they would be unlikely to be classified as suffering disproportionate economic hardship. Many of the small refineries owned by [Redacted] chose not to respond to the PI

- 588 survey. A total of 22 refineries had responded to the survey when the response period was closed on November 10,

2010. Three additional refineries sent in surveys in February, 2011. Surveys received from five refineries currently holding exemptions were deemed to exceed the small refineries RFS exemption size threshold and t wo surveys were found to be incomplete for analysis. All responses were validated against annual and monthly EIA surveys. Validated data from 18 surveys that met all criteria were the basis of the analysis of disproportionate economic hardship (see Table 9 ). More specifics on the classification of the survey responses and their validation are provided in Appendix E (Confidential Business Information) , while short summaries of each refinery examined may be found in Appendix F (Confidential Business Inform ation).27

Table 9 . Refinery Survey Responses by PADD and Ownership [CBI] used in Disproportionate Economic Hardship Analysis

Company Name Refinery Name State PADD Owne rship

[Redacted]



# X. Refiner y Viability

Over the last few decades, refining has become an increasingly challenging business due to low refining margins and increasing regulation 29 . Refiner viability refers to the ability of the refiners

to remain competitive and profitable. For example, a s survey responses were being received, four

refineries indicated [Redacted]

. These are:

[Redacted]

These refineries did not submit surveys but their economic situations reveal the fragility of refinery viab ility. To further address the economic hardship faced by these [Redacted] refineries and the 22 respondents, a series of small refinery profiles were prepared that incorporated key PI

- 588 and EIA survey data, corporate press releases and other news. Thes e profiles are provided in Appendix F (Confidential Business Information).

29 More information on environmental regulations and refinery shutdowns may be found in Appendix G.28

To have f our refineries idled in one year is unusual in recent years. Historically, the petroleum industry witnessed considerably more shutdowns each year, especially 1990

- 1995. As presented in Figure 7

, over the past two decades, U.S. refiners faced generally low refining margins. The exception was a window of time from 2005 through 2007 . A n unusual combination of rising global refined product demand, temporarily constrained gl obal refining capacity and hurricane

reduced U.S. Gulf Coast refinery production combined to increase global refining margins for

this three year period. Since 2007, conditions have changed and margins have slumped, returning to lower, more typical levels

.

Figure 7. U.S. Refining Margins and Shutdowns, 1990

- 2010

Source: Table 15. Refineries Permanently Shutdown By PAD District Between January 1,1990 and January 1, 2009, EIA, http://www.eia.gov/pub/oil_gas/petroleum/data_publications/refinery_capacity_data/ current/table15.pdf, BP Statistical Review of World Energy

– June 2010, USGC WTS Coking Cash Margins, http://www.bp.com/sectiongenericarticle.do?categoryId=9023777&contentId =7044465, Accessed 10/13/10

The r efining cash margin is typically used by the oil industry to evaluate the profitability of a given refinery. Frequently expressed in terms of cents per gallon or dollars per barrel throughput , it provides a way to measure the relative performance of one refinery versus another.

Publicly

- traded refining companies generally publish their refining economic s in their reports to the Securities and Exchange Commission in sufficient detail to arrive at a reasonable estimate of

t he refining margin of their respective refineries. T he 10 K reports from 2004 to 2009 for several refining companies were analyzed . Figure 8 present s the results of that analysis.29

Figure 8. Sample Refining Margins for Large and Small Refiners 2004

– 2009

Source: Company 10k reports and Stillwater analysis

The data indicates that refining margins for large refining companies (Chevron, ConocoPhillips, ExxonMobil, Tesoro, and Valero) were similar in trend to the refining margins for several

small er refinin g companies (Calumet, Delek, Frontier, Holly, and Western) during this period

. 30
However, the margins for the small refiner group were on average less than the large refiner

group. Margins for both groups peaked in 2006 or 2007 and were zero or negative f or 2009.

U.S. refiners have complied with a series of environmental regulations over the past two decades (see Figure 9 ). This series of regulations forced U.S. refiners to invest billions of dollars for process, logistics and other capital upgrades. I n addition, compliance with environmental regulations has increased the fixed and variable costs of refinery operations. 31 The cost of compliance contributed to economic stresses that resulted in the shutdown of 66 refineries from 1990 through 2010.

30 For several refiners, i ndividual refinery or refinery business unit data was available

. Tesoro reports data for their four refining business unit s which contain seven refineries. Delek, CVR, Holly, and Alon report individual re finery

data.

31 EIA examines the costs of compliances in the 1990s in http://www.eia.doe.gov/emeu /finance/usi&to/downstream/ch4.html

.30

Figure 9. U.S. Refined Product Environmental Regulations 1990

- 2010

Source: SAIC, 2010, EIA Table 15

- Refineries Permanently Shut Down, 2010.

The reduction in capacity is mostly due to the shutdown of small

- to

- medium

- sized refineries with less than 40,000 barr els per day capacity. This size is approximately half the size of the average operating refinery, which has grown from 80,000 barrels per day in 1990 to 120,000 barrels per day in 2010. The average U.S. refinery has grown in size by 60 percent over the p ast two decades, as smaller refineries progressively become increasingly rare

.

The experience of the refining industry over the past two decades offers insight into the costs of compliance during periods of economic distress.

The majority of the shutdown refineries (46) were privately held:

Average size (~ 20,000 barrels per day) was half as large as that of publicly

- held

refineries 37 were shut during the 1990s

17 were located in PADD 3 and 14 in PADD 531

Twenty idled refineries were publicly

- held:

Closings were distributed throughout the period Located primarily in PADDs 1 and 3 Average capacity was 40,000 barrels per day



# XI. Disproportionate Economic Hardship

Based on an analysis of recent public statements by a number of U.S. refiners of varying size, refiners appear to be somewhat optimistic regarding near

- term improvements in the U.S.

economy. As a consequence of improving economic conditions, t hey anticipate an increas e in demand for gasoline, jet fuel and diesel fuel accompanied by rising refinery utilization and margins.

H owever, despite this somewhat optimistic view, there a number of factors that will work toward minimizing demand growth and may actually reduce domestic demand. First, the RFS2 program

acts to progressively reduce demand for r efinery produced gasoline and diesel products in the

United States as the requirements for renewable products increases

. Second , changes in the Corporate Average Fuel Economy (CAFE) and EPA GHG standards for new light

- duty vehicles will negatively impact t he demand for transportation fuels , renewable and petroleum alike

. The projected reduction in demand for refinery

- produced petroleum products was discussed in previously in relationship to the blend wall and illustrated in Figure 5 (page 17 ) . As a result, the hoped

- for improvement in refinery utilization and margins may be less than those during prior

economic recoveries.

Even though the general trend is less favorable for refining industry, local markets do have an impact on refinery outlook. Some U.S. ref iners servic e niche product markets (such as lubricants) and can be less vulnerable to lower profit margins while others service geographically

- remote niche markets to buffer themselves from lower overall U.S. refining margins.

At the PADD level, differenc es in margin are also clear. The 3

- 2

- 1 Differential is often used as an approximate indicator of refining gross margins because it can be calculated based on publicly available refined product and crude oil pricing. Figure 10 illustrates that the 3

- 2

- 1 Differential for refiners in the Rocky Mountain and Mid

- Continent Regions is generally greater than in the

U.S. Gulf Coast. 32

32 The 3

- 2

- 1 Differential is the difference in price between 2/3 barrel of gasoline plus 1/3 barrel of diesel less 1 barrel of crude oil (typically a light sweet crude oil like West Texas Intermediate).32

Figure 10. Crack Spread Differentials

Source Data : EIA

.

Independent U.S. refiners are highly focused on maintaining sufficient capitalization because they operate in a capital intensive business with contin uous expenditures and v olatile refining margins. S ufficient capitalization allows them to purchase crude oil and other feedstocks on competitive terms, to remain in regulatory compliance and to survive periodic downturns in their refining business.

Independent refiners typically operate under a variety of debt covenants, including debt to equity ratios and other restrictions. Independents may have limited access to public or p rivate debt depending on the number , size, complexity and location of refineries they own and the degree to which they are integrated in their refined product transportation, storage and retail marketing

systems.



## Assessing Disproportionate Economic Hardshi p

A scoring matrix was designed to evaluate the full impact of disproportionate economic hardship on small refiners and used to assess the individual degree of potential impairment. The matrix is comprised of two major sections described individually belo w : one section combining the scoring for disproportionate structural and economic weightings, and a separate section regarding the impact of compliance with the RFS2 program on the viability of the firm. Each of the eight individual disproportionate struc tural and economic metrics is weighted equally to derive the disproportionate impact index. The i ndex is then scaled from 0 to 5, with 5 indicating conditions likely to lead to disproportionate economic hardship. Similarly, the three metrics for the viabi lity33

index are then equally weighted and scaled to the same range. The lines shaded gray have not been used in this analysis, but should be maintained as part of the matrix for use in the future when other renewable fuels become commercially available.



## Disproportionate Impacts Index Analysis

Disproportionate impacts consist of Disproportionate Structural and Disproportionate Economic measures, which are described below . Table 1 0 shows the Disproportionate Structural Impacts

metrics.

Table 10

. Disproporti onate Structural Impact Metrics

1 Disproportionate Structural Impact Metrics

a Access to capital/credit 0 = Good access (BB

- or above credit rating), 5 = Moderate access (rating in B’s) 10 = Poor access (C rating or 50% D/E)

b Other business lines besides refining and marketing 0 = Other Lines,
10 = No Other Lines

c Local market acceptance of

Renewables 0 = Products accepted, 10 = Product not accepted

i E10 0 = High acceptance, 5 = Low acceptance 10= No acceptance

ii E85 Not scored because of small E85 volumes

iii Biodiesel Not available

d Percentage of diesel production 0 = D/(G+D) < Industry Avg. 5 = D/(G+D) > Ind. Avg<40%.

10= D/(G+D) > 40%

e Subject to exceptional state regulations 0 = not subject,

5= Some barriers for compliance 10 = subject to exceptional state regulations

2 Disproportionate Economic Impact Metrics

a Relative refining margin measure 0 = Above 3 year industry average 5 = positive, and below 3 year industry average

10= Negative, 3 average,

b Renewable fuel blending (% of production)

i Ethanol blending 0 = 75%+, 5 = 25

- 74%, 10 = <25%

ii Biodiesel blending (not used) 0 = 1.1% of diesel production,

1 = <1.1%

iii Other Advanced Biofuel blending (not used) 0 = some blending, 10 = no blending

c In a niche market 0 = niche 5 = moderate niche impact

10 = no niche

d RINs net revenue or cost 0 = revenue > cost,

10 = revenue < cost

Subtotal34

1a. Access to capital/credit

. Restr ictions on capital may significantly lim it th e complia nce options for firms. If new blending facilities are need ed, borrowing would likely be necessary. High borrowing costs would have a disproportionate impact on the ability of les s c redit

- worthy firms to comply with RFS 2 . In the worst case , loan co venants may prevent firms from tak ing

cost

- effective measures for compliance. Even if the firm would be purchasing RINs , additional working capital may be needed to effectively manage the RI N purchase s

. Access to capital was provided by the survey respondents and publically available data. In the absence of credit ratings, other financial information provided by the respondent (such as debt/equity ratios) were used to

determine an individual refinery score. Those companies with poor access to capital were scored a 10 as demonstrated by a credit rating of C or below were scored a 10, below BB

- were scored a 5, and those companies above a BB

- were scored a 0.

1b. Other business lines besides r efining and marketing

. Refining margins tend to have considerable volatility. Additional lines of business, in particular upstream operations such as exploration and development that are less correlated with refining

, would tend to smooth the

firm’s cash flows, and improve its ability to borrow money at closer to the investment grade

rates. Those refineries without additional lines of business score a 10.

1 c. Local market acceptance of Renewable Fuels

. Local conditions may inhibit blending as a compliance strategy for meeting RVO s

. Blending category can be separate d as follows : low ethanol blends (E10), biodiesel and E85

. There was no scoring for E85 and biodiesel due to a

lack of data

.

i. Ethanol blending (E10). Not every state has switched completely to E10 . Some locations, due to either logistical obstacles or consumer behavior

, still sell clear (unblended ) gasoline. Refiners who reside in states with less than 75 percent

E10 blending receive a 5; those with less than 25 percent blending receive a 10.

Given the current state of ethanol blending, no state which participants in the program would cause a refiner to receive the higher score.

ii. E85. Reserved for later evaluation

iii. Biodiesel. Reserved for later evaluation

1d. Percentage of Diesel Production. While ethanol blending at 10 percent is already common,

biodiesel is normally blended at 5 percent or less due to a lack of market acceptance. Therefore, refineries that disproportionately favor diesel production over gasoline inherently have a more

diffic ult compliance pathway, as the percentage of renewable fuel available to blend into diesel is much lower than the 10 percent of ethanol that can be blended into gasoline. Refineries that have greater than the industry average of approximately 32 percent di esel production receive a score of 5; those at 40 percent diesel or above have a score of 10.

1e. Subject to exceptional state regulations

. Certain states such as Tennessee and North

Carolina require refiners to sell unblended fuel. Refiners are required to purchase RINs to meet their obligations even though they have no blending opportunities with this fuel . Also, under

certain unusual circumstances

, the interplay between the State regulations (such as the California35

Low Carbon Fuel Standard) and the Federal RFS may increase compliance costs. Those refiners subject to exceptional regulations receive a 10.

2a. Relative refining margin measure . Refining margins differ from refiner to refiner for many

reasons. In order to eliminate mark et volatility, a three year average was calculated for each small refinery. Refineries with a negative net average margin were scored a 10; those below the industry average were scored a 5.

2b. Renewable fuel blending (% of production)

. The degree to whi ch a small refiner can actively blend refinery production with renewable fuels is a large component of economic impairment. Generally, for ethanol, (and biodiesel and other advanced biofuels) the lower the proportion of renewable fuel blending the greater the impairment

.

i. Ethanol. Those refineries with between 25 and 75 percent of their gasoline at

E10 were scored a 5; those with less than 25 percent were scored a 10.

ii. Biodiesel. Reserved for later evaluation

.

iii. Advanced Biofuels. Reserved for later evaluation

.

2c. In a niche market

. The rationale for utilizing the classification of “niche” refinery is necessary to determine if it has access to specific geographical markets with limited alternative finished product supply or access to distressed crud e oil supply, thus creating higher than industry refining margins for the niche refiner. Other refineries classified as “niche” are those that produce a specialty slate of products (lube oils, greases, asphalt, etc.) in addition to gasoline

and diesel. T he sale of these types of products will also result in higher than industry refining margins. Landlocked refiners whose immediate market does not have access to a refined product pipeline are scored a 0 as are or those whose primary products are not transp ortation fuels

. Landlocked refiners with direct access to single pipeline are scored a 5. Refiners with access to more than one pipeline are scored a 1 0.

2d. RINs net revenue or cost

. This criterion was not utili zed in the current assessment due to

la ck of consistency among the survey participants. However, depending upon the business model of the small refiner, complying with their RVO can either be a net cost if they purchase all of their RINs or can generate revenue should they be able to actively t rade RINs in the open marketplace. Firms that have a small refiner exemption and generate revenue by blending renewable fuels and selling RINs are not experiencing hardship related to the RFS. The windfall profit may be utilized to offset other margin re lated impairments. From the DOE small refiner survey, many (but not all) the respondents blended ethanol in 2009. These firms separated RINs and either sold them into the market or held them for future use. Indeed, one publically traded firm reported $4 million of revenue from RINs sales in 2009. 33

33 Frontier Annual Report 200936



## Viability Index Analysis

Refiner viability refers to the ability of the refiners to remain competitive and profitable. That requires sufficient profits to make investments in the refinery to remain competitiv e. In general, small independent refiners generally lack the revenue streams generated by crude oil production and national product marketing to counteract the historic volatility in cash flows from the refining industry . Therefore, under some circumstance s, a small refinery may face compliance costs that would significantly impact the operation of the firm, leading eventually to a n inability to increase efficiency to remain competitive, eventually resulting in closure . These impacts are

evaluated in the vi ability metric shown in Table 1 1

.

Table 11

. Viability Metrics

3 Viability Metrics

a Compliance cost eliminates efficiency gains (impairment) 0 = no impact on efficiency,

10 = impact on efficiency

b Individual special events 0 = no special event,

10 = special event impacting viability

c Compliance costs likely to lead to shut

down 0 = not likely to shut down,

10 = likely to shut down

Subtotal

3a



### . Compliance cost eliminates efficiency gains (impairment). This metric evaluates w hether the totality of factors, including both survey results and public information would reduce the profitability of the firm enough to impair future efficiency improvements. While this would not

lead to immediate shu tdown, given the increasingly competitive refining market, significant constraints on efficiency improvements would eventually leave many small refineries at risk. Refineries that receive a extension of their exemption and do some blending

, could sell RIN s to improve their ability to position themselves to economically comply with RFS 2 (through capital expenditures for blending or increasing capital for a RIN purchase program) , thus reducing the impact of their future RFS2 compliance. Thus refineries that currently score high in this category and receive an extension will likely see a reduction in the scoring of this category in the future.

3b. Individual special events. Refinery specific events (such as a shutdown due to an accident, and subsequent loss of revenue) in the recent past that have a temporary negative impact on the ability of the refinery to comply with the RFS.

3c. Compliance costs likely to lead to shutdown. Some refineries have a unique vulnerability such as a weak competitive position and any significant additional burden c ould cause bankruptcy or closure . This metric cover s those refineries indicating that compliance may lead to

such an outcome.37



## Recommendation for Exemption Extension

Utilizing the individual scoring metrics and the previously described index analysis

, Figure 1 1

shows the disproportionate impacts and via bility indices for each of the eighteen refineries that

submitted sufficient data to be evaluated 34 . A recommendation o f disproportionate impact was determined if both indices were greater than 1. This requires a score equivalent to at least four of the eight metrics for disproportionate impact at the moderate level (5), and a positive value for at

least one of the three m etrics for the viability index. T hirteen of the eighteen refineries scored a 1 or higher in both indices

, thus qualify ing for a recommendation for extension of their RFS1 exemption

.

Figure 11. Refinery Rankings by PADD

[Redacted]



# XII. Findings and Conclusion

EPAct 2005, through the establishment of the RFS 1 program
, mandated a minimum renewable fuel content of gasoline , while exempt ing certain small refineries from compliance from 2007 through 2010. EP Act 2005 also required DOE to conduct a study for the Admin istrator of the

EPA assessing whether the RFS would impose a “ disproportionate economic hardship ” on the statutorily defined small refineries. On February 24, 2009, DOE transmitted its study with

recommendations to EPA.

In October 2009, Congress directed DOE to seek input from small refineries and revisit the issue

of disproportionate economic hardship for small refineries

. A survey of local market and financial data from currently exempt small refineries revealed indi vidual differences between

refineries that allowed the identification of disproportionate economic hardship among the respondents.

Eighteen refineries responded to the survey and fell within the scope of the study, and it is

recommen ded that thirteen of them should receive an extension of the ir RFS1 exemption. The refineries recommended were geographically diverse: [Redacted] . The refineries recommended for the exemption are:

[Redacted]

34 The scoring for individual refineries is presented in Appendix H.Appendix A A

- 1 

# Appendix A. Glossary

Barrel: A unit of volume equal to 42 U.S. gallons.

Biodiesel: A fuel typically made from soybean, canola, or other vegetable oils; animal fats; and recycled grease. It can serve as a substitute for petroleum

- derived diesel or distillate fuel. For EIA reporting, it is a fuel composed of mono

- alkyl esters of long chain fatty acids derived from vegetable oils or animal fats, designated B100, and meeting the requirements of ASTM (American Society for Testing materials) D 6751.

Biomass: Organic non

- fossil material of biological origin constituting a renewable energy

source.

Blend W all: T he limit to which a renewable fuel can be blended into its recipient motor fuel

. Typically used in reference to limits on ethanol’s integrati on into the U.S. fuel supply.

Blenders’ Credit: See Volumetric Ethanol Excise Tax Credit.

Blending Components ( M otor Gasoline B lending C omponents): Naphthas (e.g., straight

- run gasoline, alkylate, reformate, benzene, toluene, xylene) used for blending or compounding into finished motor gasoline. These components incl ude reformulated gasoline blend stock for oxygenate blending (RBOB) but exclude oxyg enates (alcohols, ethers), butane, and pentanes plus.

Charge capacity: The input (feed) capacity of the refinery processing facilities.

Clean Air Act (CAA): T he law that defines the EPA's responsibilities for protecting and improving the nation's air qu ality and the stratospheric ozone layer. Originally signed in 1970,

t he last major change in the law, the Clean Air Act Amendments of 1990, was enacted by Congress in 1990. Legislation passed since then has made several minor changes.

Code of Federal R e gulations: A compilation of the general and permanent rules of the executive departments and agencies of the Federal Government as published in the federal register

. The code is divided into 50 titles that represent broad areas subject to Federal regulat ion. Title 18 contains the FERC regulations.

Crude O il: A mixture of hydrocarbons that exists in liquid phase in natural underground reservoirs and remains liquid at atmospheric pressure after passing through surface separating

facilities. Depending up on the characteristics of the crude stream, it may also include : Small amounts of hydrocarbons that exist in gaseous phase in natural underground reservoirs but are liquid at atmospheric pressure after being recovered from oil well (casing head) gas in lease separators and are subsequently comingled with the crude

strea m without being separately measured. Lease condensate recovered as a liquid fromAppendix A A

- 2

natural gas wells in lease or field separation facilities and later mixed into the cr ude stream is also included; Small amounts of nonhydrocarbons produced with the oil, suc h as sulfur and various metals; and Drip gases, and liquid hydrocarbons produced from tar sands, oil sands, gilsonite, and oil

shale.

E10, E15, E85: A fuel containing a mixture of ethanol and gasoline in a particular ratio. The number is the percentage o f the fuel that is ethanol. For example, E85 is 85 percent ethanol and 15 percent gasoline.

Energy Independence and Security Act of 2007 (EISA , or EISA07 ): EISA

, Public Law 110

- 140 , was signed into law in 2007 to establish the Renewable Fuel Standard

– 2 (RFS2). Its purpose was to move the U.S. toward greater energy independence and security, increase the production of clean fuels, and promote research on and deploy greenhouse gas capture and storage options.

Energy Policy Act of 2005 (EPAct , or EPAct05 ): EPAct, Public Law 109

- 58, was signed in 2005 to establish the Renewable Fuel Standard (RFS1). Its purpose was to “ensure jobs for our future with secure, affordable, and reliable energy.”

EPA

- Moderated Transaction System (EMTS): Electronic system u se d for the generation, trading, and tracking of RINs. Established as part of RFS2.

Ethanol: A clear, colorless, flammable alcohol. Ethanol is typically produced biologically from biomass feedstocks such as agricultural crops and cellulosic residues from a gricultural crops or

wood. Ethanol can also be produced chemically from ethylene.

Form 10

- K : A form used by publicly traded companies to disclose information on an annual basis to the U.S. Securities and Exchange Commission. The annual report on Form 1 0

- K provides a comprehensive overview of the company's business and financial condition and

includes audited financial statements.

Gasoline ( F inished M otor G asoline): A complex mixture of relatively volatile hydrocarbons with or without small quantities of additives, blended to form a fuel suitable for use in spark

ignition engines. Motor gasoline, as defined in ASTM Specification D 4814 or Federal Specification VV

- G

- 1690C, is characterized as having a boiling range of 122 to 158 degrees

Fahrenheit at th e 10 percent recovery point to 365 to 374 degrees Fahrenheit at the 90 percent recovery point. Motor Gasoline includes conventional gasoline; all types of oxygenated gasoline, including gasohol; and reformulated gasoline, but excludes aviation ga soline.

Greenhouse G ases (GHGs) : Those gases, such as water vapor, carbon dioxide, nitrous oxide, methane, hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulfur hexafluoride, that are transparent to solar (short

- wave) radiation but opaque to long

- wave (infrared) radiation, thus preventing long

- wave radiant energy from leaving Earth's atmosphere. The net effect is a trapping of absorbed radiation and a tendency to warm the planet's surface.Appendix A A

- 3

Low S ulfur D iesel (LSD) F uel: diesel fuel containing more than 15 but less than 500 part s per million (ppm) sulfur.

Naphtha: A generic term applied to a petroleum fraction with an approximate boiling range between 122 degrees Fahrenheit and 400 degrees Fahrenheit.

Net Refining Margin: Often expressed in dollars per barrel. The net refinin g margin is the difference between the gross refining margin and the costs of producing and selling the petroleum products (e.g., refining energy costs and selling costs). The net margin measures

before

- tax cash earnings from the production and sale of re fined products. The net margin excludes peripheral activities such as non

- petroleum product sales at convenience stores.

No. 2 D iesel F uel: A distillate fuel oil that has a distillation temperature of 640 degrees

Fahrenheit at the 90

- percent recovery po int and meets the specifications defined in ASTM Specification D 975. It is used in high

- speed diesel engines that are generally operated under uniform speed and load conditions, such as those in railroad locomotives, trucks, and

automobiles.

Obligated P arty: Refiners, blenders, and importers of gasoline that are subject to the requirements of the RFS program.

Petroleum Administration for Defense District (PADD): A geographic aggregation of the 50 States and the District of Columbia into five Districts, with PADD I further split into three

subdistricts. The PADDs include the States listed below: PADD I (East Coast):

o PADD IA (New England): Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont.

o PADD IB (Central Atlantic): Delaware, District of Columbia, Maryland, New Jersey, New York, and Pennsylvania.

o PADD IC (Lower Atlantic): Florida, Georgia, North Carolina, South Carolina, Virginia, an d West Virginia. PADD II (Midwest): Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, and

Wisconsin. PADD III (Gulf Coast): Alabama, Arkansas, Louisiana, Mississippi, New Mexico, and

Texas. PADD IV (Rocky Mountain): Colorado, Idaho, Montana, Utah, and Wyoming. PADD V (West Coast): Alaska, Arizona, California, Hawaii, Nevada, Oregon, and Washington.

PI

- 588: A one

- time, voluntary survey used by the EIA to collect inform ation about small refineries designed to provide the necessary information to make an informed decision regarding

which small refineries merited an extension of their RFS waivers. The PI

- 588 was developed over the summer of 2010, and received clearance fr om the OMB on September 22, 2010. It was distributed electronically on September 27, 2010 to 59 refineries. It is an Excel file consisting ofAppendix A A

- 4

five parts: Respondent Identification

, Submission/Resubmission , Financial Health of Refinery

, Market Compliance

, and Market Issues

.

Refiner: A firm or the part of a firm that refines products or blends and substantially changes products, or refines liquid hydrocarbons from oil and gas field gases, or recovers liquefied petroleum gases incident to petroleum refinin g and sells those products to resellers, retailers,

reseller/retailers or ultimate consumers. "Refiner" includes any owner of products that contracts to have those products refined and then sells the refined products to resellers, retailers, or

ultimate c onsumers.

Refinery: An installation that manufactures finished petroleum products from crude oil, unfinished oils, natural gas liquids, other hydrocarbons, and oxygenates.

Refining Cash Margin : Represents all product revenues minus the costs of feedstocks (crude oil plus other feedstocks) and minus other operating costs. It is f requently expressed in terms of cents per gallon 1

.

Renewable E nergy R esources: Energy resources that are naturally replenishing but flow

limited. They are virtually inexhaustible in duration but limited in the amount of energy that is available per unit of time. Renewable energy resources include biomass, hydro, geothermal, solar, wind, ocean thermal, wave action, a nd tidal action.

Renewable Fuel Standard (RFS1, RFS2): RFS1 was established in 2005 (effective 2007) with the passage of EPAct

. RFS1 created a specific annual level for minimum renewable fuel use that

increases over time

. RFS2 was established in 2007 (e ffective 2010) with the passage of EISA.

RFS2 is the revised and expanded version of RFS1.

Renewable Identification Numbers (RINs): RINs are assigned to each batch of renewable fuel produced. RINs demonstrate an obligated party’s compliance with its RVO under the RFS

program.

Renewable Volume Obligation (RVO) : RVO expresses the minimum renewable fuel use that obligated parties must meet under the RFS program. The RVO is expressed as a percentage of

total non

- renewable gasoline sold by the obligated par ty in the specified calendar year. Compliance is demonstrated through the use of RINs.

Small Refinery: A refinery for which the average aggregate daily crude oil throughput for a calendar year does not exceed 75,000 barrels. This definition comes from Section 211(o)(9)(A)(ii) of the C lean Air Act.

Super M ajor: Term used to describe the six largest private

- sector oil companies in the world. These six companies are BP, Chevron, ConocoPhillips, ExxonMobil, Royal Dutch Shell, and

Total.

1 Page 121 (page 127 of the electronic version) http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/petroleum_issues_trends_1996/ENTIRE.PDFAppendix A A

- 5

Ultra

- L ow S ulfur D iesel (ULSD) F uel: diesel fuel containing a maximum 15 parts per million (ppm) sulfur.

Volumetric Ethanol Excise Tax Credit (VEETC) : Commonly known as a “blenders’ credit,” VEETC was created as part of the American Jobs Creation Act of 2004. It provide s oil companies with an economic incentive to blend ethanol with gasoline.Appendix B B

- 1 

# Appendix B

. RFS Market Operations , RINs

and the Fuel Supply Chain

Evaluating Industry Obligations

Stillwater Associates conducted informal telephone surveys with oil industry participants in August and September 2010 to gain information around the cost of complying with the Renewable Fuel Standard. Feedback was received from survey participants about how they calculated their Renewable Volume Obligation (RVO). Subsequently, it was discovered that these calculations were incorrect and would lead to potential over

- compliance with RVO. With DOE’s concurrence, Stillwater then worked with EPA to gain clar ity around the regulation. The following sections review the compliance process and address some ambiguities in EPA regulations.

Participation in the RFS may have a significant impact on profitability depending upon RIN pricing. We quantify the impact o f variations in pricing through an example.



### Background

The Energy Independence and Security Act of 2007 (EISA07), Public Law 110

- 140 passed by

the 110 th Congress of the United States, was signed on December 19, 2007 to establish the

Renewable Fuel Standar d

– 2 (RFS2). As a result, on May 26, 2009, the US EPA issued its Notice of Proposed Rule Making and invited the industry to provide comments. The comment period was initially to expire on July 27, 2009, but was extended by 60 days to September 25, 2009, to allow the public additional time to provide comment on the proposed rule.

On February 3, 2010, the US EPA announced it had set the RFS2 factors effective July 1, 2010 and followed its announcement on March 26, 2010 with its 236 page Final Rule 40 CF R Part 80 published in the Federal Register pages 14669

- 15320.

The first 195 pages of the Final Rule constitute the Preamble where various discussions, explanations and background information occur. Page 14717, attached as Table A

, contains the formulas by which the RFS2 percentage factors are calculated, but the Final Rule does not show

the values used in the formulas 1

.

1 Preliminary values for 2011 may be found in the Federal Register Vol. 75, No. 138 pg 42250. Tuesday, July 20, 2010. The final percentages may be found at in the Federal Register at Vol. 75, No. 236 Thursday, December 9, 2010 pg 76804.Appendix B B

- 2

The last 41 pages of the Final Rule contain the rules and is entitled “Part 80

- Regulation of Fuels

and Fuel Add itives”. It contains Sections 80.1400 through 80.1468, with Sections 1405, 1407, 1415, 1425, 1426 and 1427 being the greatest concentration of rules.



### General Approach for Meeting the 2010 RVOs

First, calculate the total volume of on

- road and off

- road gas oline and diesel that is refined, imported or blended from components and thus is subject to an RVO.

Second, calculate the RVO for D Code 3 Cellulosic and subtract any 2009 rollover RINs subject to the 20% maximum rollover cap. The remainder is the amount of 2010 Cellulosic RINs needed

to meet the 2010 Cellulosic RVO.

Third, calculate the RVO for D Code 4 Biomass Based Diesel and subtract the "Used" 2008 and

2009 Biomass Based Diesel RINs available and the "Unused" 2008 and 2009 Biomass Based

Diesel RINs available subject to the two rollover cap limits. The remainder is the amount of

2010 Biomass Based Diesel RINs needed to meet the 2010 Biomass Based Diesel RVO.

Fourth, for any Cellulosic Diesel RINs D Code 7 RINs available, decide how many should be

ap plied to the Cellulosic RVO and how many should be applied to the Biomass Based Diesel

RVO.

Fifth, calculate the RVO for Total Advanced Biofuels and then subtract the rollover 2009 and 2010 Cellulosic RINs, the 2010 Biomass Based Diesel RINs and the "unus ed" 2008/2009

Biomass Based Diesel RINs. The remainder is the amount of 2010 D Code 5 Other Advanced Biofuel RINs needed to meet the 2010 Total Advanced Biofuel RV0. As you will note, the

"Used" 2008/2009 Biomass Based Diesel RINs can be used to meet the 2010 Biomass Based

Diesel RVO but not the 2010 Total Advanced Biofuel RVO.

Sixth, calculate the RVO for Total Renewable Fuels and then subtract the rollover 2009 and 2010 Cellulosic RINs, the 2010 Biomass Based Diesel RINs, the "Unused" 2008/2009 Biomas s Based Diesel RINs, the 2010 Other Advanced Biofuel RINs and the rollover 2009 corn ethanol RINs. (The sum of all of the rollover RINs is limited to the rollover cap of 20% of the 2010 Total Renewable Fuel RVO). The remainder is the amount of 2010 corn e thanol RINs needed to meet

the 2010 Biomass Based Diesel RVO.



### Conference Calls with the US EPA

During the Stillwater industry surveys conducted to assess DEH, it became apparent the industry interpreted the Final Rule in different ways. A series of conference calls were made between David Korotney of the US EPA and David Bulfin of Stillwater Associates LLC during

Novemb er and December of 2010 to review how an Obligated Party (OP) should use its RINs to meet its RVO. A summary of the rules is as follows:Appendix B B

- 3

1. Biomass Based Diesel RINs generated in 2010 can be used to meet the entire 2010 Biomass Based Diesel RVO, and can als o be used to meet the 2010 Total Advanced Biofuels and the

2010 Total Renewable Fuel RVOs.

2. Biomass Based Diesel RINs generated in 2008 and 2009 that were previously used for meeting the 2008 or 2009 RFS1 mandate (status “Used”), can be reused to meet the 2010 Biomass Based Diesel RVO with no rollover cap. However, they cannot be used to meet the 2010 Total Advanced Biofuels RVO or the 2010 Total Renewable Fuel RVO. Thus, if an OP uses lots of "Used" 2008 and/or 2009 RINs, the OP could fall short of meetin g 2010 Total Advanced Biofuels RVO. As a result, the OP would need D Code 5 cane ethanol RINs to

meet the Total Advanced Biofuels RVO.

3. An OP cannot purchase another company’s Used RINs to meet its own RVO.

4. Biomass Based Diesel RINs generated in 2008 and 2009 that were not used for compliance in 2008 or 2009 (status "Unused"), can be used to meet the 2010 Biomass Based Diesel RVO but are limited by the two rollover caps defined in 80.1427(a)(7)(iii). These RINs can be

used to meet the 2010 Advanced Total Biofuel RVO and the 2010 Total Renewable Fuel

RVOs.

5. "Unused" RINs were unused because they were either excess or they were attached to renewable fuels that were used as, or blended into, non

- road fuels (boiler fuel, jet fuel).

These RINs were not valid under RFS1, but can be reinstated (reactivated) under RFS2 for 2010 only.

6. An OP can purchase another company’s unused RINs to meet its own RVO.

7. The use on Unused RINs is subject to two rollover caps.

8. The first rollover cap relates to 2008 excess and ret ired

- then

- reinstated Biomass Based Diesel

RINs and is set at a maximum of 8.7% of the 2010 Biomass Based Diesel RVO. The rationale behind the 8.7% is explained in the middle of the far

- right

- hand column of page 14719 of the Final Rule. When meeting the 2 009 Biomass Based Diesel RVO of 0.5 BG, 2008 RINs were limited to the 20% rollover cap, or 0.1BG. Carrying forward this 2008 RIN limit of 0.1 BG into 2010, it represents 8.7% (0.1/1.15) of the total 2010 Biomass Based

Diesel RVO of 1.15 BG.

9. The second ro llover cap relates to the total combined 2008 and 2009 excess and retired

- then

reinstated Biomass Based Diesel RINs and is set at a maximum of 20% of the 2010 Biomass Based Diesel RVO. The rationale behind the 20% is it is a compromise rate between the

re finers wanting 50% and the RFA wanting 0%.

10. If the 20% rollover cap limits the use of available RINs to meet a subcategory RVO, an OP can use the rest of the available subcategory RINs to meet a higher category RVO until its higher volume 20% cap is met. However, the US EPA assumes an OP would sell the more

valuable sub

- category RINs for cash and then buy the less valuable higher category RINs.Appendix B B

- 4

11. Each 20% rollover cap includes the sum of all the RINs being carried over for all the categories.

12. The 1.5 mult iplier for Biomass Based Diesel is not applicable if volumes are expressed in terms of paper Gallon

- RINs instead of physical gallons.

13. A D Code 7 Cellulosic Diesel RINs can be applied to either the Cellulosic RVO or the Biomass Based Diesel RVO, but not both.

Other comments from the conference calls with the US EPA are as follows:

1. Although there is a provision in the Final Rule to carry over 57% of 2010 Biomass Based Diesel RVO into 2011, the degree of complexity experienced in 2010 is not anticipated to occur in 2011. This is because no more “Used” prior year RINs are allowed and no more “Unused” RINs from 2 years prior are allowed.

2. Based on Table IV.B.3

- 2 on page 14752 of the Final Rule, from a practical standpoint there

will be little or no D Code 7 ( Cellulosic Diesel ) RINs generated during 2008 and 2009

. At the time of this writing, the US EPA does not recognize D Code 7 or D Code 5 RINs under RFS1 which lasted until June 30, 2010. However, Brazilian sugar cane ethanol imports would qualify as an Other Advanced Biofuel with a 50% GHG reduction and a D Code 5

RIN.

Average vs. Marginal Ethanol RINs:

The impact on refiner margins of a rapid rise in RINs prices can be illustrated by discussing the

economics of three refiners in different circumstanc es relative to the RFS. In the illustration, Company A blends all its production with ethanol, so it does not have to purchase ethanol RINs. Company B does not do any blending and must purchase RINs to meet all of its RVO. Company

C has excess RINs to s ell into the market. Company C could be a blender that does not have an RVO, i.e. a gasoline marketer, or it could be a refiner who blends in excess of its RVO.Appendix B B

- 5

In the above example, the companies experience an average price for gasoline, ethanol and RINs for eleven months of a year. In the last month, December, RINs prices increase by ten times, from 1.5 cpg to 15 cpg. The average RIN price is 1.5 cpg and the marginal RIN price is 15 cpg.

The companies value their gasoline at 200 cents per gallon and ethanol at 190 cpg. Companies A & C have a fuel margin on a gallon of E10 of 1 cpg, (10 cpg gasoline price

– ethanol price times 10%.) They reduce their excise tax obligation with the VEETC by 4.5 cpg of E10.

Company A does not have to buy any et hanol RINs, so its “Blender Margin” is the fuel margin of 1 cpg + the tax credit of 4.5 cpg or 5.5 cpg. This reduces the cost of its product to 194.5 cpg. Company B does not blend and has to buy RINs. Its total cost is 200.15 cpg. Company C blends

ethan ol, reduces its taxes and sells a RIN. This reduces its cost to 193.00 cpg.

On average, Company A has a cost advantage over Company B of 5.65 cpg and Company C has an advantage over Company B of 5.8 cpg.

In the final month, when RINs prices go to 15 cpg, Company A’s advantage vs. Company B grows to 7.00 cpg and Company C’s advantage grows to 8.50 cpg. Assuming a net refining margin of 5 cpg, high RIN prices could significantly impair the profitability of non

- blending

small refineries.Appendix B B

- 6



### Table A. Calculation of RVO Percentages

Source: Vol. 75, No. 58 / Friday, March 26, 2010 pgs 14717

- 14718.Appendix B B

- 7



### A Comparison of the Physical Flow of Product with the Flow of RINs

Figures B

- 1 and B

- 2 illustrate the physical flow of gasoline and ethanol in the distribution system. In Figure B

- 3 , the flow of RINs is overl aid on the illustration of the physical flow.Appendix B B

- 8

Figure B

- 1

. Physical Flow

– Refinery Truck RackAppendix B B

- 9

Figure B

- 2

. Physical Flow

– Off

- Refinery Truck RackAppendix B B

- 10

Figure B

- 3

. RIN FlowAppendix C C

- 1 

# Appendix C

. DOE Ethanol Model Description

Through the use of an econometric model w e investigate the impact of the combination of precipitation, crude oil prices, and discretionary blending on the ethanol supply and demand market in the next two years, as well as the variables up on which ethanol depends: corn and ethanol prices

. This a ppendix provides a five equation model determining ethanol supply and demand quantities and prices, price of corn, and the retail price of gasoline. The equations are estimated using two stage least squares with standard errors robust to heteroskedasticity and autocorrelation using yearly data from 1986 to 2009. The parameter estimates are intended to be

used a s a basis for examining policy questions regarding the ethanol market, RFS, and waivers

within a stochastic framework.

The model equations are presented below.

Ethanol Supply (Equation 1)

Ethanol Demand (Equation 2)

Retail Gasoline Price Excluding Taxes (Equation 3)

Corn Price (Equation 4)

Corn Yield (Equation 5)

All

, , , , coefficients are calculated from regression analysis of the explanatory

variables provided in each equation. Equations 3, 4, and 5 can be substituted into equations 1 and 2, equated, and then solved for the PETHANOL2005D (price of ethanol in 2005 constant dollars).

Table C

- 1 summarizes the variables within the model, their units, and their dependencies. For example, historical precipitation data was used to create the regression model, a nd assumptions are made about the possible rainfall in 2011 and 2012. On the other hand, production of ethanol in billion gallons per year (Ethanol S upply and Demand ) is calculated by the regression model

,Appendix C C

- 2

and therefore an output of the model and directly and indirectly dependent on all model

variables 1

.

Table C

- 1. Model Variables

Variable Units Function of: Historical

Data Assumption

(Input) Regression

(Output)

Precipitation Inches/Month

--- Yes Yes

---
Ethanol Supply and

Demand Billion

Gallons/Year Ethanol Price,

Gasoline Price, Corn Price, Ethanol Mandate,

Number of Ethanol

Plants Yes

--- Yes

Refiner Acquisition Cost (RAC) $/Barrel

--- Yes Yes

---

Gasoline

Price $/Gallon Refinery Utilization

, Refiner Acquisition

Cost (RAC)

Ethanol Price 2 Yes

--- Yes

Ethanol

Mandate Billion

gallons/Year --- Yes Yes

---

Corn Price $/Bushel Ethanol Production, Corn yield Yes

--- Yes

Volumetric

Ethanol

Excise Credit (VEETC) $/Gallon

--- Yes Yes

---

Ethanol Price $/Gallon Corn price, Refiner Acquisition Cost Yes

--- Yes

Nominal monthly ethanol prices are average rack prices in Nebraska obtained from Nebraska’s Energy Statistics website and averaged to produce yearly prices. Ethanol production and the number of ethanol plants were obtained online from the Renewable Fuels Association. Nominal monthly corn prices are average prices received by farmers in the U.S. from USDA’s Economic Research Service (USDA/ERS) and converted to yearly prices. Corn yields were also collected

1 Ethanol supply and demand are determined through equation one and two, but some variables of equations one and two are outputs of equation 3, 4 and 5.

2 Elasticity of ethanol price (as related to gasoline price) is determined to be 0.19 through regression analysis , for every 1% increase in ethanol demand price, all else constant, an increase of 0.19% is observed in the gasoline price. This elasticity is applied in model run post

- processing.Appendix C C

- 3

from USDA/ERS. The nominal retail price of gasoli ne (exclusive of taxes) is the U.S. city average retail price for regular unleaded gasoline taken from EIA’s Monthly Energy Review and averaged to produce a yearly price. The nominal refiner acquisition cost is the U.S. crude oil composite acquisition cos t by refiner and was collected from EIA. Refinery utilization rate is the annual refinery utilization rate provided by EIA. Precipitation figures for the U.S. corn

- belt were gathered from the Nation al Climatic Data Center website. All nominal dollar val ues were converted to constant 2009 dollars using the GDP deflator from the 2010 Economic Report of the

President

.

Historical values for all variables are presented from 1999

- 20 10 and independent variables are projected into the future (2011 and 2012) in Figures C

- 1 through C

- 6

, and dependent variables calculated by the regression model are presented in Figures C

- 7 through C

- 10

.

Figure C

- 1 details historical annua l rainfall within the U.S. corn

- belt for the last decade . As expected, rainfall varies each year. Rainfall data from 1986

- 2009 is used within the regression analysis , and over that time period the average annual rainfall is found to be 2.91 inches/month. Corn yield is intimately tied to the precipitation in any given year (equation 5) and maximum corn yield is attained at the average annual rainfall, thus allowing for modeling of drought and

flood conditions. Any deviation from the average will yield a less than optimal corn yield, and Figure C

- 2 illustrates the affect on expected corn yield for 2011

.

Figure C

- 3 outlines the historical and projected Volumetric Ethanol Excise Credit (VEETC). Congress has recently passed legislation for continued VEETC of $0.45 per gallon, and this

value is assumed for 20 11 and 2012. The VEETC has decreased over the last decade in real and

constant dollars , and is projected to be $0.45 (real dollars) in the nea r future. The VEETC is $0.44 and $0.43 in 2009 constant dollars for 2011 and 2012, respectively.

Refiner Acquisition Cost (RAC) is used as a regression variable to account for the influence of crude oil on ethanol production and consumption within the U.S. Typical RAC is a few dollars more than the WTI crude oil price. RAC is projected to be $ 82 for 2011 an d $ 84 for 2012 3 in the

base case ($90 and $92.2 in 2009 constant dollars for 2011 and 2012, respectively)

. Figure C

- 4 provides the RAC historical and projected values in constant 200 9 dollars.

Figure C

- 5 provides the historical and projected number of et hanol plants within the U.S. Number of ethanol plants is used as a proxy for ethanol production capacity within the United States. As the U.S. production capacity gets close to the maximum mandate of corn ethanol (15 billion gallons per year) new constru ction should slow and total number of plants should reach a

maximum value 4 ; thereafter, number of plants should decrease due to increased plant efficiency

and economies of scale.

Figure C

- 6 shows the historical and regression values for corn yield (bus hels/acre). Corn yield has increased over the past decade and is expected to grow in the future. Corn yield is primarily

3 The RAC price represents the crude oil pric e as of December 2010

. 4 The model uses a constant value of 170 plants in 2011 and 2012.Appendix C C

- 4

a function of rainfall and increasing efficiency of corn growers. Change in corn yield due to variability in rainfall has been demon strated in Figure C

- 2.

Figure C

- 7 provides historical and regression values for corn prices. Within Equation 4 corn price is a largely a function of corn yield and the volume of ethanol produced. However, Equations 1,2,3, and 4 have interdependent var iables, thus corn yield is effectively a function of

all m odel variables. Corn price varies with market and meteorological conditions, although general trend over the last decade indicate s an increase in price. Under optimal rainfall conditions, and a cr ude oil price of approximately $ 90

- $ 92.2 dollars, regression analysis projects a corn price of $ 4. 40

- $ 4.42 per bushel over the next two years.

Figure C

- 1. U.S. Average A nnual Precipitation

– Corn BeltAppendix C C

- 5

Figure C

- 2. Projected Corn Yield vs. Rainfall (2010)

Figure C

- 3. U.S. Volumetric Etha nol Excise Tax Credit (VEETC)Appendix C C

- 6

Figure C

- 4. Refiner Average Crude (RAC) Oil Acquisition Cost

Figure C

- 5. Number of Ethanol Plants in the U.S.Appendix C C

- 7

Figure C

- 6. U.S. Corn Yield

Figure C

- 7. U.S. Corn PricesAppendix C C

- 8

Figure C

- 8. U.S. Yearly Ethanol Production

Figure C

- 9. U.S. Retail Gasoline PriceAppendix C C

- 9

Figure C

- 10. U.S. Ethanol Supply Price

Figure C

- 8 details the historical ethanol production over the last decade and the regression results

of ethanol production for 2011 and 2012 under optimal rainfall and approximately $ 90

- $ 92.2 dollars crude oil price. Under optimal conditions ethanol production is expected to rise steadily to meet and exceed the corn ethanol mandate of 12.6 and 13.2 billion g allons per year.

Historical price of gasoline over the last decade and regression results for 2011 and 2012 are provided in Figure C

- 9. Retail gasoline price is a function of ethanol and crude oil price and under $ 90

- $ 92.2 dollar crude oil price retail gasoline price is expected to be $2. 68

- $2.78 per gallon.

Figure C

- 10 provides historical price of ethanol over the last decade and the regre ssion results

for 2011 and 2012 . Ethanol price is a function of all of the model variables, and under $82

- $84 dollar crude oil price and optimal rainfall conditions ethanol price is expected to be 2.3 7

- 2. 39 without the VEETC subsidy.

The DOE model describe s the ethanol supply and demand market in the next two years, as well

as corn, e thanol, a nd gasoline prices. Under optimal rainfall conditions and crude oil price of $82

- $84 per barrel

, the model predicts ethanol production above the mandated levels in 2011 and 2012, within the motor gasoline pool and therefore the quantity of Renewa ble Identification Number ( RINs ) generated should exceed the Renewable Volume Obligation ( RVO ) comfortably

and RINs traded between parties should cost no more than the transaction cost. However, ifAppendix C C

- 10

market and meteorological conditions are worse, then it i s possible for reduced levels of ethanol production and blending which will lead to an increase in RIN prices

.

In the following analysis the DOE model is used to identify conditions that may be conducive to generating high RIN prices within the marketpla ce. Parametric analysis reveals that High RIN prices can be expected due to a period of drought or flooding , or over

- blending of ethanol by obligated parties among other factors

.

The four cases in Table C

- 2 represent four states of the world that may exist in 2011 and 2012, and the assumptions for the cases. Scenario A represents a “Best Case Scenario” where optimal rainfall creates conditions for low ethanol price due to a high corn yield

, crude oil price is

maintained at December 2010 levels ($82

- $84 per barrel), and ethanol production is

unconstrained. Scenario B dampens the expectations of a high corn yie ld by introducing poor

rainfall , leaving all other conditions the same as Scenario A. Poor rainfall is defined by r educing the average annual rainfall (in inches per month) from the optimal (2.91 inches/month) to rainfall amount two standard deviations below the normal (2.0 7 inches/month) 5 . Scenario C requires blending to increase to RVO, while under the poor rainfall condition described in Scenario B

. Scenario D considers a situation where obligated parties blend above the RVO under poor

rainfall conditions, in anticipation of future RIN shortages.

Table C

- 2. RIN Scenarios Description

Scenario Precipitation

(Inches/Month) Crude Oil Price ($/Barrel) Blending Level

A Optimal (2.91) ($82

- $84) Unconstrained

B Poor Rainfall (2.07) ($82

- $84) Unconstrained

C Poor Rainfall (2.07) ($82

- $84) Constrained (RVO

- 9. 0 % in 2011, 9. 2 % in 2012 )

D Poor Rainfall (2.07) ($82

- $84) Constrained (9.5%)

Un der Scenario A optimal rainfall and $82

- 84 crude oil prices ample existing ethanol production capacity within the U.S. allow s for ample ethanol pro duction in 2011 and 2012. 13. 57 billion gallons of ethanol produced under optimal r ainfall condition represents 9. 7 % blending of ethanol by v olume in motor gasoline (139.3 billion gallons 6 ) expected to be consumed within the U.S

. in

2011. Ethanol production is expected to increase to 14. 0 2 billion gallons (10.1 % blending of ethanol) in 2012 due to increases in overall ethanol production capacity under optimal rainfall

conditions

. Under Scenario A

, the level of blending is above the required mandate of 12.6 and 13.2 billion gallons in 2011 and 201 2, respectively; therefore, over

- compliance should lead to a surplus of RINs in the marketplace and RIN price can be expected to be negligible

in 2011 and 2012.

5 The definition of a drought is beyond the scope of this paper. In order to approximate a drought condition, rainfall

was set to two standard deviations below the mean, covering approximately 95% of all outcomes.

6 EIA AEO2011Appendix C C

- 11

Under Scenario B, annual rainfall is expected to be two standard deviations lower than the

op timal case (Scenario A). As expected, poor rainf all leads to a lower corn yield which puts upwards pressure on corn prices. Higher corn prices lead to reduced ethanol production and higher ethanol and gasoline prices

. If ethanol blending is allowed to occ ur without regards to the RVO in 2011 and 2012 (no ethanol mandate), the model predicts reduction of 1.4 0 billion gallons of ethanol production an increase in corn price of $2. 2 1 per bushel and an increase in ethanol price of $0. 62 per gallon in 201 1 when compared to Scenario A

. Since the projected amount of ethanol produced in Scenario B is below the ethanol mandate (12.6 and 13.2 billion gallons in 2011 and 2012) and obligated parties a re required to blend to the RVO

, Scenario B would require addition consumption of ethanol.

Scenario C forces obligated parties to blend to the RVO under poor rainfall conditions in order to comply with the RFS program , thus boosting ethanol production to 12.6 and 13.2 billion gallons in 2011 and 2012, respectively , as c ompared to Scenario B

. A RIN cost of $0.3 5 per ethanol gallon blended is introduced within the model to increase ethanol production to 12.6 billion gallons in 2011 and from $.58 from 12.91 to 13.2 billion gallons in 2012

. The other key prices

and market metrics may be found in Table C

- 3 below. RIN prices of $0.32 and $0. 58 may exist

i n 2011 and 2012 in order to increase ethanol production to meet the mandate due to poor

rainfall conditions outlined in Scenario C

.

Scenario D investigates the possibility of over

- blending under poor rainfall conditions. If obligated parties over

- blend in order to accumulate RINs for future compliance, the increased production (a nd consumption) of ethanol may lead to higher RIN prices

. Scenario D predicts a RIN price of $0.81 and $0. 87 per ethanol gallon blended in 2011 and 2012, if the obligated parties blend ethanol at 9.5% (by volume) within the motor gasoline pool. Corresponding corn, ethanol and gasoline prices may be found in Ta ble C

- 3.

All prices reported in Table C

- 3 are in constant 2009 dollars.Appendix C C

- 12

Table C

- 3 . RIN Price Scenarios for 2011 and 2012

7 EIA AEO2011 Rainfall

VEETC RIN Price Ethanol Mandate MoGas Use 7 Crude Oil Price Ethanol Production Ethanol % in MoGas Ethanol Price Corn Price

Wholesale Gasoline Price

Inches/ Month $/ Gallon $/ Gallon Billion Gallons/ Year Billion Gallons/ Year $/Barrel Billion Gallons/ Year Percent

$/ Gallon

$/ Bushel

$/Gallon

2011

A 2.91 $0.4 4 $0.00 12.6 139.3 90 13.57 9.7% $2. 94 $4. 40 $2. 60

B 2.07 $0.4 4 $0.00 12.6 139.3 90 12.17 8.7% $3. 58 $6. 83 $2. 73

C 2.07 $0.4 4 $0.3 8 12.6 139.3 90 12.60 9.0% $3. 75 $6. 95 $2. 76

D 2.07 $0.4 4 $0. 92 12.6 139.3 90 13.23 9.5% $ 4.02 $ 7.12 $2. 80

2012

A 2.91 $0. 43 $0.00 13.2 143.0 92.2 14.02 9.8% $ 3.05 $4. 42 $2. 61

B 2.07 $0. 43 $0.00 13.2 143.0 92.2 12.46 8.7% $3. 69 $6. 87 $2. 73

C 2.07 $0. 43 $0. 64 13.2 143.0 92.2 13.20 9.2% $ 4.00 $ 7.08 $2. 78

D 2.07 $0. 43 $0. 95 13.2 143.3 92.2 13.59 9.5% $ 4.14 $ 7.18 $2. 80Appendix D D

- 1 

# Appendix D . PI

- 588 Survey Form

Introduction

The 2010 Small Refineries Exemption Study was developed to determine if small refiners suffer

“ disproportionate economic hardship ” through compliance with the Renewable Fuel Standard (RFS). In an effort to collect input from small refiner ies for use in the study, the Department of Energy’s Office of Policy and International Affairs (PI) developed an original survey instrument to gather data on specific characteristics of individual small ref ineries

. Th e optional survey

allow ed respondents to submit data that provide d technical support for a determination of disproportionate economic hardship.

The survey elements, in conjunction with previously collected and other public data were used to characterize the firm’s cost of compliance and its financial resilience in the face of estimated compliance costs associated with the RFS2 regulation. D ata elements from the survey, including capital costs, operating costs

, ability to generate Renewable I dentification Numbers ( RIN s) and projected RIN costs w ere used to estimate the cost of compliance in cents per gallon of product

.

The survey was submitted to the Office of Management and Budget (OMB) for review and

c learance on July 8, 2010. A Federal Register Notice 1 and 30 day public comment period were opened on July 15, 2010.

The survey received clearance from the Office of Management a nd Budget on September 22,

2010 and was distributed electronically via email to 59 small refineries on September 27, 2010

. The survey was to be completed and returned electronically using a designated PI website by October 25, 2010.

The survey consist ed of five parts:

Respondent Identification

Submission/Resubmission Financial Health of Refinery

Market C ompliance

Market Issues

Time series questions sought three years of data (2007, 2008, 2009 for historical series and 2010, 2011, 2012 for future looking series). The cover letter, survey form, surv ey instructions, and

electronic filing instructions are p rovided in this appendix

.

1 Federal Register: July 15, 2010 (Volume 75, Number 135)

. http://edocket.access.gpo.gov/2010/2010

- 17288.htmAppendix D D

- 2

Figure D

- 1. Survey Cover LetterAppendix D D

- 3

Figure D

- 2. PI

- 588 Survey FormAppendix D D

- 4Appendix D D

- 5Appendix D D

- 6Appendix D D

- 7Appendix D D

- 8

Figure D

- 3. PI

- 588 Survey InstructionsAppendix D D

- 9Appendix D D

- 10Appendix D D

- 11Appendix D D

- 12

Figure D

- 4 . Survey Submit InstructionsAppendix E E

- 1 

# App endix E

. PI

- 588 Survey Response

Survey Responses

The EPA list of refineries holding RFS exemptions served as the basis of identifying potential respondents to the PI

- 588 survey. Of the 59 refineries that met the qualifications for possible extension of exemption, [Redacted] submitted a Form PI

- 588

. [Red acted] and [Redacted] responded by declinin g to participate in the survey

. One company, [Redacted] , responded that [Redacted] they were not able to respond to the survey. Three companies advised DOE that

their four refineries were eith er not producing transportation fuels or no long in operation due to financial hardship : [Redacted]

DOE permitted these four to forego submitting the survey. An additiona l [Redacted] refineries did not respond to the survey or communicate with DOE. Rem inder emails were sent but no

calls were made to non

- respondents.

DOE received surveys from [Redacted] refineries. During validation efforts, five refineries were found to exceed the “small” threshold established for compliance with RFS2 guidelines:

[Redacted]

In addition, [Redacted] submitted incomplete surveys for its two refineries in [Redacted] and [Redacted] . These surveys could not be used in the analysis.

As a result, 18 surveys were considered valid and used in the disproportio nate eco nomic hardship analysis (see Table E

- 1)

. The refineries are distributed across all five PADDs, with five located in PADD 3 and four located in PADD 4. Nine of the refineries are privately held and eight belong to public companies (see Table E

- 2).

Table E

- 1. Valid Refinery Responses by PADD and Ownership

[Redacted]Appendix E E

- 2

Table E

- 2. Summary Responses by PADD and Ownership

[Redacted]



### Validation of Form PI

- 588

To e nsure the integrity of the data submitted on the Form PI

- 588,”RFS2 Small Refinery Survey 2010,” responses to the survey were validated against information from other sources including survey data from the Energy Information Administration (EIA), corporate financial data submitted to the Security Exchange Commission (SEC), and information from previous studies. Edits that checked for possible inconsistencies or errors within the submitted forms were also developed and performed. In addition, analysts with extensive knowledge of the refinery industry reviewed the data for inconsistencies or possible errors.

The validation of the Form PI

- 588 included:

Part 3, Financial Health of the Refinery

For publicly traded companies, responses to “Part 3, Financial He alth of the Refinery” were compared to data reported to the SEC on Form 10

- K. Edits were also developed and applied to all responses to insure the reasonableness of the data (e.g. the reported Gross Refining Margin is greater than the reported Net Refinin g Margin, the reported Rate of Return on capital projects greater than the reported Average Cost on capital projects

, )

Part 4. Cost of RFS2 Compliance

– Refinery Level

EIA data were used to validate responses to parts 4 and 5 of the PI

- 588 survey. The Off ice of Policy and International Affairs (PI) of DOE signed a Memorandum of Understanding with EIA that allowed PI to have access to petroleum data submitted to EIA from 2002 to the most current data available on appropriate weekly, monthly, and annual petr oleum survey forms. The EIA data provided analysts with detailed respondent level data for analysis and background information, for use in portions of the report, and for validation of data provided by the respondents to the PI

- 588 survey.

EIA refinery and terminal level receipts, inputs, and production data for motor gasoline blending components (MGBC), low and mid sulfur distillates, fuel ethanol, and bio

- diesel

submitted on Form EIA

- 810, “Monthly Refinery Report” and Form EIA

- 815, “Monthl y Bulk Terminal and Blender Report” were used to validate refinery and terminal level input and blending cost of compliance data in Part 4 of Form PI

- 588.

Part 5. Market Share

– Refinery LevelAppendix E E

- 3

EIA refinery level operable capacity, crude inputs, and throu ghput data from Form EIA

- 810 were used to validate how much of the transportation fuel produced at the refinery could accept renewable fuels and then be sold as gasoline, gasoline blendstock, or diesel fuel.

EIA refiner level data on Form EIA

- 782C, “Mo nthly Report of Prime Supplier Sales of Petroleum Products Sold for Local Consumption” were used to validate the responses to the market share questions for sales of gasoline and diesel fuel.



### Validation Results

Data cells that failed edits or validation were reviewed by analysts. In some cases, the value was manually adjusted. This usually occurred because of an incorrect unit of measure, e.g. the form asked for thousands of barrels per day and the respondent obviously reported barrels per day.

One q uestion was disqualified from the PI

- 588 survey responses. Question 4.13 “ How many RINS did you separate through blending in 2009? ” was the source of 13 invalid and 7 valid responses. The overwhelmingly problematic response was not included in the analys is. With the removal of question 4.13, the overall invalid response rate for the survey was 13.4 percent.

For other edit or validation errors, the analysts determined if the response was reasonable or

consistent with other available information or if the difference between the expected response and reported response was significant enough to change the determination of disproportionate economic hardship. None of the edit or validation failures were found to be significant enough to impact the refinery ra nking scores in the scoring matrix developed to evaluate the individual degree of impairment of disproportionate economic hardship. A summary of the responses by participant may be found in Table E

- 3.Appendix E E

- 4

Table E

- 3 . PI

- 588 Survey Response and Disposition

[Redacted]Appendix F F

- 1



### Appendix F . Small Refinery Profiles

These profiles contained Business Confidential information and have been redacted.Appendix G G

- 1 

# Appendix G . Shutdown Refineries

The past two decades have witnessed the permanent shutdown of 66 refineries in the United States. This appendix expands the discussion of shutdowns that appeared in Section X “Refinery Viability”.



### Shutdown U.S. Refining Capacity

As discussed in the Section X, refiners have experienced increasing costs due to environmental regulations and periods of low U.S. refining margins over the past two decades. During the period from 1990 to 2010 approximatel y 1. 7 m illion barrels per day of U.S. refining capacity was shut down (see Figure G

- 1 ). T he majority of the shut down capacity consisted of small to

medium sized refineries. The loss of these smaller refineries , as well as existing refinery expansions, con tributed to an increase in the average U.S. refinery size

– up by approximately 60

percent over the last 20 years.

Figure G

- 1

. Average U.S. Refinery and Shutdown Refinery Size s 1990

- 2010

Source: SAIC Analysis, EIA, Table 15. Refineries Permanently Shutdown By PAD District http://www.eia.gov/pub/oil_gas/petroleum/data_publications/refinery_capacity_data/current/table15.pdf , BP Statistic al Review of World Energy

– June 2010, U.S. Refining Capacities, http://www.bp.com/sectiongenericarticle.do?categoryId=9023777&contentId=7044465 The Growing Threa t to US

Refiners

– U.S. Policy, Regulation and Low Cost Imports seen Triggering Rationalization, Brian L. Milne, http://oilspot2.dtnenergy.com/e_article001715841.cfm

, Accessed 10/13/10

.Appendix G G

- 2

Th is analysis considered the ownership

, geographic location, capacity, and last year of operation

for the shutdown refineries . This history can hel p explain current stresses on refineries suffering “disproportionate economic hardship.” Key features of the refinery shutdowns over the past 20

years (from Tables G

- 1) include:

Total shutdown capacity of almost 1.7 million barrels per day was nearly equally divided between privately and publicly

- owned refineries Approximately twice as many private refineries we re shut down than public ones Almost three quarters (72 percent) of the refineries were shut down in the 1990’s. This

includes:

o 81 percent of the lost capacity (37 of 46 refineries) operated by privately

- owned

o 40 percent of the lost capacity (11 of 20 refi neries) operated by publicly

- owned refineries was shut down during the 1990s Average size of privately

- owned shutdown refineries were half as large as publicly

owned shutdown refineries Average size of shutdown refineries increased over time as the smaller

- sized facilities

were shuttered Large publicly

- owned refineries became shutdown targets in 2009

Table G

- 1. U.S. Shutdown Refineries by Ownership and Date Shutdown , 1990

- 2010

Measure O wnership Date of Shutdown Total 1990

- 1994 1995

- 1999 2000

- 2004 2005

- 2010 Unknown

Number Private 23 14 5 3 1 46

Public 7 4 4 4 1 20

MBD
Capacity Private 326,450 375,350 123,315 32,500 6,100 863,715

Public 229,675 98,500 83,880 414,000 3,000 829,055

Average

Size (MBD) Private 14,193 26,811 24,663 10,833 6,100 18,776

Public 32,811 24,625 20,970 103,500 3,000 41,453

In addition to the timing of the shutdowns, the geographic distribution of those shutdowns is important (see Table G

- 2).

Most of the shutdown privately

- owned refineries were located in PADDs 3 and 5 Most of the shutdown publicly

- owned refineries were loc ated in PADDs 1 and 3 Privately

- owned shutdown refineries appear to be smaller than 33,000 barrels per day on average regardless of the location Shutdown privately

- owned refineries were largest in PADD 2 are on average, twice as large as those in PADD 1 an d three times as large as those in PADDs 3 and 4 Publicly

- owned shutdown refineries were largest in PADD 1 (over 82,000 barrels per day) and PADD 2 (almost 45,000 barrels per day) Publicly

- owned refineries with capacities averaging 20,000 barrels per day w ere shut down in PADDs 3, 4, and 5Appendix G G

- 3

Table G

- 2

. U.S. Shutdown Refineries by Ownership and PADD, 1990

- 2010

Measure Ownership PADD Total 1 2 3 4 5

Number Private 4 10 17 1 14 46

Public 5 4 6 2 3 20

MBD
Capacity Private 57,350 323,815 187,700 10,000 284,850 863,715

Public 413,000 177,500 132,680 48,000 57,875 829,055

Average

Size (MBD) Private 14,338 32,382 11,041 10,000 20,346 18,776

Public 82,600 44,375 22,113 24,000 19,292 41,453

Refinery data presented in this appendix was developed from EIA listings of shutdown refineries, enhanced by information gather ed from corporate and news websites. The complete listing is shown on Table G

- 3.Appendix G G

- 4

Table G

- 3 . Refinery Shutdowns 1990

- 20 10Appendix G G

- 5Appendix G G

- 6

Notes: Most refineries become terminals after shut down, likely due to expensive cleanup when EPA licenses are revoked. By converting to terminals, sites keep their licenses, do not have to perform expensive cleanups

, and can restart operations withou t requiring new permits.

Refineries in bold were o wned by public companies

. Sources: EIA, c orporate and news websites.Appendix H H

- 1 

# App endix H

. Disproportionate Economic Hardship

Refinery Rankings

The scoring matrix contained within the report evaluates the full impact of disproportionate economic hardship on small refiners and assesses the individual degree of potential impairment. The matrix is comprised of two major sections: one section combini ng the scoring for disproportionate structural and economic weightings, and a separate section regarding the impact of compliance on the viability of the firm. The ranking methodology is fully described within the report. Table H

- 1 provides the detailed scores, and Figure H

- 1 provides the disproportionate impacts and viability indices for each of the eighteen refineries that submitted sufficient data to

be evaluated.Appendix H H

- 2

Table H

- 1. Refinery Ranking Estimates

[Redacted]Appendix H H

- 3

Figure H

- 1. Refinery Rankings by PADD

[Redacted]