By Jarrett Renshaw and Stephanie Kelly
(Reuters) - U.S. merchant oil refiners like Monroe Energy and PBF Energy Inc are playing chicken with the White House, taking moves in the biofuels credit market that could force them to close plants and fire union workers unless the Biden administration bails them out by changing the rules on blending biofuels in gasoline.
Merchant refiners have long tried to dismantle a U.S. law requiring them to blend biofuels like ethanol into their fuel or buy credits from competitors who do.
But until very recently, they largely continued to participate in the multibillion-dollar credit market by buying credits to offset their production, a Reuters analysis of earnings releases shows. Now, some of these refiners are building up record short positions in the credits.
They are betting U.S. President Joe Biden will ultimately side with refiners and their union supporters and roll back the law, known as the U.S. Renewable Fuel Standard (RFS), experts interviewed by Reuters said, but this would anger the Farm Belt.
Refiners have leverage right now because rising fuel price are hurting Biden's poll ratings.
"This is nothing more than a political shakedown," Brooke Coleman, executive director of the Advanced Biofuels Business Council, told Reuters. "These refineries are daring the Biden White House to make them lie in the bed they made by intentionally running up massive short positions," on biofuel credits.
Refiners who had little outstanding biofuel credit liabilities a year ago have let them climb to record highs in the third quarter, according to a review of their latest financial filings.
(Graphic: Refineries' ramped up biofuel debts - https://graphics.reuters.com/USA-BIOFUELS/WHITE-HOUSE/znpnekxowvl/chart.png)
* Monroe Energy, a subsidiary of Delta Airlines, , has increased its potential biofuel liabilities to a company record of $547 million by the end of the third quarter, up from just $68 million a year prior, the latest filing shows.
* PBF Energy Inc has amassed a $1.3 billion credit liability from halting or slowing purchases, according to its third quarter filing, up from $236 million a year earlier.
* CVR Energy, whose majority owner is billionaire Carl Ichan, has a $442 million credit liability, according to the company's third quarter filing, up from $83 million a year earlier.
None of the companies responded to requests for comment.
“This whole situation is proof of how broken the RFS program is. ... The program is making it more expensive to produce gasoline and diesel in the United States," Chet Thompson, President of American Fuel & Petrochemical Manufacturers said on Thursday.
In 2017, Carlyle Group-backed Philadelphia Energy Solutions (PES) stopped buying compliance credits, eventually amassing a $350 million outstanding obligation before it eventually filed bankruptcy. The U.S. Environmental Protection Agency (EPA), as part of the bankruptcy hearings, waived about half of those costs.
The PES refinery eventually shut after a massive explosion in 2019.
“PES taught the market that you can play chicken with the EPA and win. It’s a form of civil disobedience of the law,” said Ed Hirs, an energy economist at the University of Houston.
Hirs said shorting the market is clearly a strategic play, but the gambit carries great risk.
“If the administration doesn’t buckle, then these companies will have to pay billions of dollars to comply. That could force Monroe Energy into bankruptcy and we will see if Delta reaches into its pockets to bail out the refinery,” Hirs said.
HISTORIC YEAR FOR CREDITS
Refiners must turn in the compliance credits to the EPA by March for the previous year, giving them plenty of flexibility on when they take these costs. In the past, refiners purchased biofuel credits daily to match their production, even though they could defer buying if they believe the prices are too high or to manage cash flow.
Prices for the compliance credits, known as RINs, have traded erratically in a historic year for the market. After hitting an all-time record in June at $2.00 each, renewable fuel (D6) credits traded at $1.08 on Wednesday. That level is still above where they started the year at about 80 cents.
In September, Reuters reported that the Biden administration was considering big cuts to the blending requirements. Such a move would anger farm-state voters, so a decision has been delayed as Democratic lawmakers try to pass other big-ticket bills.
DISRUPTIVE SHUTDOWN THREATENED
Refiners have argued to the White House that the higher RIN costs have boosted prices for gasoline, which have hit above $3.40 per gallon. They have noted that the plants, including ones in Biden's home state of Delaware, offer high-paying union jobs.
Now at least one producer is threatening to shut a refinery over outstanding biofuel liabilities the company has run up.
In recent weeks, Monroe Energy has made a presentation to various stakeholders, including local politicians and labor leaders, painting a stark outlook for its refinery outside Philadelphia, according to two sources who have seen the documents.
The company presentation made clear that either the Biden administration intervenes and rolls back U.S. biofuel laws or its around 200,000 barrel-per-day refinery will be forced to shut its doors and lay off hundreds of union workers, the sources said.
If the Biden administration fails to intervene and prices stay at current levels, the Delta refinery would have to go into the market and settle a significant portion of its $547 million liability in upcoming months.
The refinery recorded a $186 million loss in the first three quarters of 2021, filings show.
"They made it clear that this is the hill they are preparing to die on," said a source who has seen the presentation.
(Reporting By Jarrett Renshaw and StephanieKelly; Editing by Heather Timmons and David Gregorio)