"Six months ago, no one did this type of due diligence," Beth Hilbourn, a consultant for Turner, Mason & Co. who tours biofuel plants and combs through regulatory filings for clients, said Tuesday. "Now, all the obligated parties are trying to figure out exactly how to do it. They want to understand if there's any risk involved."
Obligated parties are the gasoline refiners, blenders and importers required to inject increasing amounts of biofuels into the transportation fuel supply under the federal Renewable Fuel Standard. The companies have until Tuesday to tell the Environmental Protection Agency which renewable identification numbers (RINs) they plan to use to prove their 2011 compliance.
Since November, EPA has accused two companies of selling RINs without producing the biodiesel volumes the credits purported to represent. It said Clean Green Fuel of Maryland generated and sold more than 32 million (M) fake credits, and Absolute Fuels of Texas generated and sold 48M.
Biodiesel RINs were trading this week at about $1.39/credit for 2011 compliance and $1.46/credit for 2012 compliance. Rodney Hailey, owner of Clean Green Fuel, faces an indictment on fraud and money laundering charges in U.S. District Court for the district of Maryland. Federal investigators in Lubbock, Texas, sought search warrants last year against Absolute Fuels and CEO Jeffrey David Gunselman. No criminal charges have been filed. EPA issued a notice of civil violation in late January.
RINs traders have talked of as many as five more producers being targeted for selling fraudulent credits.
Mary Manners, EPA's deputy director of compliance, acknowledged that more notices of violations could be in the works. "I have a hunch that there may be more but I can't say definitively," she said in an interview in early February.
David McCullough, a lawyer for the Washington law firm Sutherland Asbill & Brennan, who specializes in the renewable fuel mandate, predicted that no one would use Absolute Fuels or Clean Green Fuel credits for compliance in reports due this week. But he said obligated parties must decide how much weight to give market rumors about other RIN sellers—whether to throw out those credits too or to use them until EPA declares them invalid.
Small Biofuel Producers at Risk
Hilbourn said the fallout has created two tiers of producers, with the smallest at risk of closing shop if they cannot find buyers for their credits.
"It's easier to accept RINs from a big-name player," she said.
In response, biofuel plants are trying to supply refiners with as much information as possible upfront, including details the industry might have treated as confidential before the scandal, Hilbourn said.
"Many entities seem to believe the onus is on the smaller producers to at least work with the obligated parties to validate their name in the market place," McCullough said. "That might constitute having direct discussions with the obligated parties saying, 'If you want to visit our facility, come on out.'"
That does not necessarily mean mid-level producers are out of luck, he added. Some importers or gasoline blenders are looking for a modest volume and might turn to a single producer to fill the obligation.
"They operate on the margins and they blend when the margins are right," he said. "They have a relatively small [renewable volume obligation]. They don't necessarily, at least that side of the business, command the market presence to enter into a deal with a large renewable fuel producer."
EPA gives obligated parties an option of carrying a credit deficit, but not more than once in two consecutive years. McCullough predicted few companies would go that route because they want to retain that flexibility in case EPA declares another batch of credits invalid.
Charlie Drevna, president of the American Fuel & Petrochemical Association, said the refining sector can’t move on from the scandal until EPA assures that it has ferreted out the fraud.
"Until every one of these fraudulent RIN schemes have been identified, until we are absolutely certain there are no more out there, we have to be very careful as an industry," he said. "Are there others out there? Are EPA and the FBI investigating others that we don't know about that we're continue to buy RINs from?"
EPA Administrator Lisa Jackson defended her agency's handling of the fraudulent RINs during a Feb. 28 hearing of two House of Representatives energy subcommittees. Representative Gene Green, a Texas Democrat, questioned the decision to go after buyers of credits along with the companies that sold them. Green said it was unfair to target "good faith purchasers."
Jackson said the rules are clear that both sides of a RIN transaction bear responsibility for ensuring the credit's validity.
"There is fraud potential in the system, and while we can. . .look for opportunities to track down that fraud, fraud in the system in this marketplace also requires that buyers beware and that they ensure that what they're buying" is valid, she said.
Jackson said the requirement was important for small biodiesel producers and noted that the main purchasers of RINs have the wherewithal to check their validity.
"The large oil companies buying these credits have resources they could bring to bear" to ensure that RINs are valid, Jackson said.
Meghan Gordon and Nick Juliano, Platts