By Chris Prentice
NEW YORK (Reuters) - Valero Energy Corp (NYSE:VLO) on Tuesday signaled that record high costs to comply with the U.S. renewable fuels program will continue this year, after the oil refiner was hit with a ballooning tab for the program in 2016.
Valero, the largest independent U.S. oil refiner and the first of the sector to report 2016 results, said it expects its costs to meet annual biofuel blending targets required through the Renewable Fuel Standard (RFS) to be similar in 2017 to the $749 million last year.
"At this level, this is a significant issue for us so we continue to work aggressively with regulators," said Chief Executive Officer and President Joe Gorder on an investor call to discuss earnings.
These higher reported costs come at a tumultuous time for the Environmental Protection Agency (EPA), which oversees the program. U.S. President Donald Trump, who took office this month, has pledged to slash costly regulations. Valero and others have been pressing EPA to make changes to the program.
Valero's 2016 total compliance tab well surpassed the $517 million the company reported paying three years earlier, when paper credits used by oil companies to meet the requirements soared to record high prices.
The RFS requires oil companies either blend increasing volumes of renewable fuels into gasoline and diesel or buy compliance credits, known as Renewable Identification Numbers (RINs), from those that have. Prices of renewable fuel credits in 2016 were below those record levels, but oil companies needed more to meet higher requirements for ethanol and biodiesel use.
Valero's biofuel blending costs totaled $217 million in the fourth quarter, $60 million higher than the year-ago period. The year's tally of $749 million was $309 million higher than a year earlier, Valero said in a statement on the company's 2016 results, which showed higher-than-expected profits thanks to strong ethanol margins.
Valero is also one of the largest U.S. ethanol manufacturers.
So-called "merchant refiners," which are unable to blend transportation fuels and thus have to buy RINs in an opaque and volatile market, last year requested regulators consider changing the RFS to push the costs of compliance further downstream as the costs swelled. EPA is currently receiving comments on the topic.
Renewable fuel RIN prices have plunged nearly 40 percent since Trump's election. The president has sought to install leaders, including an EPA chief, who have been critics of the RFS.
