Eastern Railroad Discussion > More about the PES ethanol bankruptcy

The Philadelphia Energy Solutions (PES) facility on the south side of Philadelphia is the destination for many ethanol and crude oil trains. Its parent company filed for bankruptcy in January, the company is expected to reorganize, wipe out the share holders, and continue in business as a new firm.

Forbes magazine has an interesting opinion / article about the business behind the ethanol blending with gasoline, why it has to be done as the last stage of distribution, and what may come next. The Trump administration has summoned players in the business (oil companies, refiners, ethanol producers, and investors) to meet with them to discuss possible changes in the programs. This has a direct bearing on how many rail cars of corn and ethanol are hauled. If the use of credits is scaled back, or the subsidy formula changed, that may result in a significant reduction of rail cars hauled.

The article is a good primer on the use of RINs, how the regs came about, and why serious changes will be difficult to implement. A lot of powerful people are invested in the way things are currently done.

https://www.forbes.com/sites/ellenrwald/2018/01/22/ethanol-policy-puts-philadelphia-refinery-into-bankruptcy/#1de0100537e6

PES is a refinery (2 actually) and they do not blend ethanol. That is why they were financially stressed. In order to comply with the renewable fuels act, they had to buy RINS to compensate. Purchasing of

RINS is one of the big costs associated with their bankruptcy.

Much more to the story:

Reasons PES Likely Filed For Bankruptcy Protection
1) Following a global collapse in crude oil prices in late 2015 and early 2016, producers in
the Bakken, which was the predominate supplier of PES crude oil, suddenly found it
uneconomic to continue producing in certain of the higher-cost fields in the region and,
as a result, production declined by approximately 25% from over 1.2 million barrels per
day in late 2015 to less than 1.0 million barrels per day in late 2016.
2) At approximately the same time, new pipeline capacity was put in service to connect the
Bakken region to the U.S. Gulf Coast, providing crude oil producers with alternatives,
and the U.S. government unexpectedly lifted the 40 year-old domestic crude oil export
ban in late 2015.
3) As a result of these factors, producers in the Bakken had less crude oil to sell and were
now free to export this crude oil to foreign refiners who, unlike PES, were not burdened
by higher transportation costs associated with the requirement of the Jones Act. It became
cheaper to transport crude oil from North Dakota to points in Western Europe than it was
to transport the same crude oil to Philadelphia.
4) Moreover, when the Dakota Access pipeline opened in June of 2017, rail shipments of
Bakken crude to East Coast refiners ended, depriving PES of profitable crude oil
feedstocks.
a. In 2014, PES processed 13.9% of the total Bakken crude shale from North
Dakota.7 This change likely nullified some of expected value from the $185.9
million spent to increase rail oil handling capacity at PES.

7 Philadelphia Energy Solutions Inc., Amendment No. 7 to Form S-1, Page 27 A material decrease in crude oil
production in the Bakken region could result in a material decrease in the volume of attractively priced Bakken
crude oil processed by Refining. Retrieved from SEC EDGAR website
5) With the crude oil export ban lifted, this combination of curtailed crude oil production in
the Bakken along with cheaper transportation via a combination of new pipelines and
foreign-flag vessels to foreign refiners, provided producers in the Bakken with a higher
realized price for crude oil than they could achieve by selling to PES.
6) For over eight years since RINs were introduced, PES has apparently chosen not to invest
in renewable fuel blending infrastructure or strike a deal that enables it to attain RINs at
lower prices.
a. In 2010, the EPA estimated the cost of blending infrastructure to be roughly 9.6
cents per gallon of ethanol. According to industry experts, PES could have
invested around $40 million to build the blending infrastructure needed to
secure its required RINs by blending biofuels. Instead, PES has spent a
reported $832 million buying RINs since 2012.8
b. Other merchant refiners such as Tesoro and Western Refining (now andeavor)
have all made investments or entered into agreements with blenders to limit RIN
costs.
c. PES already sells ethanol to Sunoco for blending with motor fuel.9 Other
independent refiners have agreements to provide blenders/marketers with both the
ethanol and gasoline required for blending. In those agreements, the RINs
attached to the provided ethanol are usually returned to the refiner. Why would
this not be the case with the PES-Sunoco agreement?
Conclusion
The publicly available evidence points to the fact that PES finds itself in financial difficulty due
primarily to changes in its available feedstocks and other management decisions. It does face a
problem of having to acquire RINs to meet the looming RFS compliance deadline, but that is due
in large measure to its reported decision last fall to sell off the RINs it had acquired, presumably
in hopes of being able to buy them back at lower cost before the compliance deadline. Moreover,
if PES had taken the sensible approach of other merchant refiners and invested in ethanol
blending infrastructure or partnered with a blender, it appears it would have no need to purchase
RINs at all.