By Humeyra Pamuk and Jarrett Renshaw
NEW YORK (Reuters) - The Trump Administration has temporarily frozen a program meant to exempt small oil refineries in financial distress from the U.S. biofuels law, as it reviews the scoring system to evaluate applications, according to two sources familiar with the matter.
The review means changes are likely to the program, which has become a lightning rod of controversy between the rival oil and corn industries since the Environmental Protection Agency vastly increased the number of waivers for last year.
Under the U.S. Renewable Fuel Standard, oil refiners must increasingly blend biofuels like corn-based ethanol into their fuel each year or purchase blending credits from those that do. The regulation was passed in 2005 to help farmers and cut fuel imports.
But small oil refineries can be exempted from the standard if they prove that compliance would cause disproportionate hardship. The EPA granted 29 such waivers for the 2017 compliance year, up from 14 in 2015 and 20 in 2016.
The biofuels industry and lawmakers representing farm states have argued that the expansion hurt farmers by eroding demand for ethanol and want the program halted. But refiners consider the program a lifeline to small facilities and have won lawsuits accusing the EPA of being too stingy with waivers.
The two sources, who requested anonymity to discuss the matter, said over the past week that the Trump administration was delaying consideration of any new waivers while the Department of Energy reviews its scoring system for applications. The department evaluates waiver requests and provides recommendations to the EPA.
That has placed on hold seven applications for the 2017 compliance year, and 15 applications for the 2018. Typically, the EPA waits until the latter half of the year to begin reviewing applications because applicants need to demonstrate financial hardship using hard figures for their facilities.
An EPA official confirmed the review. "I think what DOE needs to do is tighten up their approach and we need to do the same," said the official, who asked not to be named. "I honestly don't know where they'll end up and whether they're going to make any changes at all."
Whatever the outcome, it could have a dramatic impact on the multi-billion-dollar credit trading market, which has been hard-hit by the waiver expansion.
Credits, called Renewable Identification Numbers or RINs, have dropped in value from over $1 to 10 cents this week as reports emerged of the number of EPA waivers granted last year. Some of those went to facilities owned by big, profitable companies like Chevron Corp (NYSE:CVX) and Andeavor, which recently merged with Marathon Petroleum Corp (NYSE:MPC), Reuters has reported.
That cut in credit prices has saved merchant refiners that lack enough biofuel blending facilities, like Valero Energy Corp (NYSE:VLO), PBF Energy Inc and Carl Icahn's CVR Energy Inc hundreds of millions of dollars in compliance costs.
The issue has placed President Donald Trump in a tough spot between two key constituencies, as he tries to support the agriculture industry slammed by the impact of his trade war with China, and keep costs down for the oil industry.
Biofuel supporters had argued the expansion of the waiver program was politically driven by former EPA Administrator Scott Pruitt, an Oklahoman considered an oil industry ally. Pruitt resigned in July in a flurry of ethical scandals, and has been replaced by Andrew Wheeler, a former coal lobbyist.
"Under the last EPA chief, the waiver program became a cookie jar open to every well-connected refinery owner, and we're seeing the results across rural America with biofuel plants closing their doors or idling production," Brook Coleman, head of the Advanced Biofuels Business Council, said.
The EPA has blamed the program's expansion on recent federal court rulings, triggered by challenges filed by small refining companies Holly Frontier and Sinclair, which said the agency was using too strict of a test to determine disproportionate hardship.
All hardship applications are first handled by the Energy Department, which determines whether compliance would lead to disproportionate impact, or threaten a refinery's viability. The final decision on applications rests with the EPA.