Independent refiner Valero Energy Corp. said its biofuel blending costs more than tripled to $173 million (157m) for the second quarter of 2016, primarily due to its purchase of Renewable Identification Numbers (RIN) credits.
The group announced the statement in its second-quarter 2016 results.
The US-based RFS programme requires oil refiners and importers to blend more renewable fuel or buy paper credits in an opaque market. Compliance credits to meet the standards, known as RINs, were about 25% higher in the second quarter than a year earlier.
To increase the amount of biofuels in gasoline, the Renewable Fuel Standard (RFS) administered by the Environmental Protection Agency (EPA) was enacted through laws passed in 2005 and 2007.
Today, around 10% of fuel sold as motor gasoline is corn-based ethanol. RIN and Renewable Volume Obligations (RVO) are the mechanisms the EPA uses to implement the RFS program. RVOs are the targets for each refiner or importer of petroleum-based gasoline or diesel fuel, while RINs allow for flexibility in how each of them may choose to comply.
Soaring biofuel blending costs
In its second-quarter results statement, Valero said its refining segment reported $1.3 billion of operating income ($954 million of adjusted operating income) for the second quarter of 2016, compared to $2.2 billion of operating income for the second quarter of 2015.
The decline was primarily attributable to weaker gasoline and distillate margins. Other factors included narrower sweet crude oil discounts relative to the Brent benchmark and higher costs to meet our biofuel blending obligations (primarily for the purchase of RINs).
Biofuel blending costs were $173 million in the second quarter of 2016, which was $117 million higher than the second quarter of 2015. Valero continues to expect such costs to be between $750 million and $850 million for 2016.
Elsewhere, Valeros ethanol segment reported $69 million of operating income ($49 million of adjusted operating income) for the second quarter of 2016 compared to $108 million of operating income for the second quarter of 2015.
Ethanol production volumes averaged 3.8 million gallons per day in the second quarter of 2016, which was consistent with the second quarter of 2015. Valero said expects ethanol demand to remain strong given high gasoline demand in the US and attractive economics for corn-based ethanol exports.
Overall profits for Valero plunged 40% in the second quarter as a glut of petroleum products weighs on prices and trims margins.
Valero reported net income of $814 million, down from $1.4 billion in the second quarter of 2015. Earnings per share fell to $1.73 from $2.66. Second-quarter revenue fell more then 20%, to $19.6 billion from $25.1 billion in 2016.
Valero chief executive Joe Gorder acknowledged a challenging earnings environment, but said the company was encouraged by strong demand for refined products in the US and globally, as well as low prices of crude oil, the feed stock for refiners. US demand for gasoline is at record highs, but inventories also have grown as refiners produced gasoline at even faster rates.
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