Bill Hudson PRX • July 23, 2013

1. From a “Long-term Mandate”toComplete Annual Uncertainty—Can Biofuel Players Make “Educated Guesses” about RFS? Bill Hudson PRX • July 23, 2013

2. What was once thought of as a “long term mandate” has become—per its own cellulosic waiver provision— an Arbitrary Annual Rule, by which EPA can introduce great Uncertainty, including the threat each year of incentivizing vast amounts of sugar ethanol imports.

3. What will the Final Rule do to the relative value of D3, D4, D5, & D6 RINs?

4. D6 RIN shortage “driving the boat”!

8. EPA in 11-16-2012 Drought Waiver Decision: “E-10 is approaching the point where it saturates the gasoline market. As a result, if obligated parties choose to achieve their required RFS volumes (RVOs) using ethanol they should work with their partners in the vehicle and fuel market to overcome any market limitations on increasing the volume of ethanol that is used. Over ten million FFVs are now in the existing fleet. Such vehicles would be capable of consuming billions of additional gallons of ethanol.” But only 2% of retail stations offer E85 Enabled by $1.05/gal RINs, 3-11-13 Question. What does EPA mean by, “Obligated parties . . . should work with their partners in the vehicle and fuel market to overcome any market limitations on increasing the volume of ethanol that is used.” Where does this “provision” appear in EISA?

9. Major Independent Gasoline Retailers, who may capture value from blending and separating RINs, are free to offer motor fuel blends of their choice, that they believe best serve the public’s pleasure. Quick Trip at 119th St, Olathe, KS, opened in May-2013, offers “No Ethanol E087” at 24 cts/gal over E10 (87 octane), and does not offer E15 or E85. [7-20-13]

11. RFS-1 (2005) (2 RINs) Distribution Forcing The 7.5 billion gallon biofuel mandate for gasoline in 2012 could be met with existing products—e.g., ethanol at E10—and in existing stations, with the forecast for US gasoline demand at + 150 billion gallons per year RFS-2 (2007) (5 RINs, but no change in structure) Distribution Forcing The 15 billion gallon conventional mandate for 2015 cannot be met with ethanol at E10 in existing retail stations, with forecast US gasoline demand dropping from 156 billion gallons (AEO2007) to 131 billion gallons (AEO2013) Technology Forcing The D3, D4, D5, and D7 RINs must drive new technology and investment in 21 billion gallons of production an distribution of Advanced Biofuel (of which 16 in Cellulosic Biofuel) HOW GOALS OF RINs CHANGED

12. “Asymmetric Forcing”: Both RFS-1 and RFS-2 designate Obligated Parties to be Refiners But refiners do not own the retail distribution system, and cannot force the owners of independent stations to invest in and offer such fuels as E15 and E85; And refiners are not the primary Advanced Biofuel producers, and cannot force them to produce the quantities wanted by Congress and EPA. Large independent retail distributors Who are NOT Obligated Parties and do NOT have their own RVO (Renewable Volume Obligation), but with access to the proper wholesale gasoline BOBs (Blends for Oxygenate Blending) and the facilities to buy, store, and blend ethanol, are eligible under EPA rules to “separate” the RIN from its physical gallon and capture its value. Not having an RVO, why should these independents invest in offering E15/E85—no matter the short-term price signal—inviting misfueling liabilities, and with a very uncertain outlook for future RFS policy? “Economic Forcing”: All refiners use a common network of pipelines to distribute gasoline BOBs, and economics generally “forces” a very few standard products. Thus, will we suddenly see that retail distributors—and the Public—have mainly one choice at stations, namely E15? What’s Going to be “Forcing” What? _______*The concept of “asymmetric forcing” was used by the DC Circuit Court in the Jan-25-2013 decision in API vs. EPA. “EPA applies pressure to one industry (the refiners), yet it is another that enjoys the requisite expertise, plant, capital, and ultimate opportunity for profit. The refiners are in no position to ensure, or even contribute to, growth in the cellulosic biofuel industry. ‘Do a good job, cellulosic fuel producers. If you fail, we’ll fine your customers.’”

13. On Mar-20-2013, an American Petroleum Institute study said what will happen by 2015—with declining total demand for gasoline, no E15, some (decent) increase of E85, and disappearance of surplus RINs—is a virtual shutdown of the refining industry, to avoid non-compliance. As the shutdown gradually reveals itself, supplies of transportation fuel to the public become shorter and shorter (trucks first)—resulting in enough “severe economic harm” that EPA must itself waive the RFS, or plunge the country into economic chaos. RFA replied the same day, “The oil industry is attempting to erect a bogus blend wall, to protect its virtual monopoly over the transportation fuel marketplace.” RFA added that any real blend wall “disappeared the day the EPA approved E15” for use in (now) roughly 85 percent of all the vehicles now in the US fleet. But “Big Oil has attempted to erect a blend wall through its own actions”—by not adopting E15 at the retail pump. “Big Oil can tear down that wall just as quickly, if you call their bluff.” Are “Big Oil Refiners” Prolonging the E10 Blend Wall Deliberately—Perhaps to Defeat the RFS and Regain Petroleum Market Share? (Or Is a Bigger Fight Underway?)

14. But Big Oil has a different Big Problem breaking in recent weeks—that might even be considered “existential.” What happens to the stock values of all fossil fuel companies if environmentalists succeed with their new initiative of “unburnable carbon”? This (incredible!) line of thought is “an effort to define and then wall off the portion of the world’s still-vast reserves of coal, oil, and natural gas that might, if combusted, cause unacceptably costly or dangerous climate change.” (Andrew Revkin, NYT, May 3, 2013.)

15. Did Congress intend an off-ramp if Cellulosics volumes were not happening?