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By Sabina Zawadzki
NEW YORK (Reuters) - For U.S. refiners facing a multibillion-dollar bill linked to the soaring cost of renewable fuel credits, a U.S. move toward easing biofuel mandates brought to mind the first step in breaking a bad habit: recognizing there is a problem.
But, they warned, it will be weeks or months before they can fully shake off the surging costs caused by a scramble to fulfill their obligation to blend growing volumes of biofuel into gasoline and diesel. And a full recovery, some added, would require changing the law that mandates a massive shift toward renewable fuels in the world's biggest consumer.
On Tuesday, the Environmental Protection Agency said it would be forced to scale back targets for biofuel use in U.S. fuel next year, seeking to avoid a situation in which ethanol use in gasoline would exceed the 10 percent level that is the widely accepted norm -- the "blend wall", as it is known.
"The important part was this genuine acknowledgement here that the RFS2 mandate system really has a significant problem and that problem will become really exacerbated in 2014," Philip Rinaldi, CEO of Philadelphia Energy Solutions (PES), the largest refiner on the populous U.S. East Coast, said in an interview.
But the EPA offered little insight into how exactly it would scale down the complex Renewable Fuels Mandate, the first significant reduction in targets since the RFS was created in 2005. It said new targets would be published in September, leaving the specter of weeks more uncertainty.
The refining industry has long said that increasing the amount of ethanol it must blend, even as motor fuel consumption is broadly falling each year -- will force it to spend billions on ethanol credits to offset obligations because blending at such levels would produce fuel that could damage vehicles.
Many were reluctant to celebrate too soon.
"Today's announcement by the EPA looks good on paper, but we will have to wait and see what the effects will be on current RINs prices," said Bill Klesse, CEO of Valero. "RINs have become a market all to themselves, which was never the intention of the law."
The early evidence wasn't encouraging. The credits used to track compliance with the RFS, known as Renewable Identification Numbers or RINs, dipped by around 10 percent on Tuesday, trading just below 90 cents for 2013. Although down from a record of $1.48 last month, they are still more than 10 times the price last December, before fears of the "blend wall" intensified.
AN "OBLITERATED MYTH"
In theory, the EPA's promise to use "flexibilities" in the RFS law in order to ease next year's targets should be good news for refiners, who feared that falling gasoline demand may leave them logistically unable to meet the targets.
Refiners will have an extra four months to adhere to the 2013 targets, with the deadline extended to June 30, 2014, which could ease the rush on RINs this year.
The run-up in RIN costs has shifted the debate in Washington, with refiners seizing the opportunity to talk about passing the cost on to consumers through higher gasoline prices and also crank up exports to record rates. They are not required to submit RINs for fuel that is sold overseas.
Ethanol proponents who have fought for years to prevent any backsliding in the mandate welcomed the EPA's move, hoping it might ease pressure on Congress to amend or repeal the RFS.
"The EPA's announcement indicates the agency is willing to make adjustments to the mandate to fit market realities," said Michael McAdams, president of the Advanced Biofuels Association. "I think it sends a signal to the market that they're inclined to use their flexibility," McAdams said.
The biofuels industry says it backs the RFS because it weans Americans of foreign oil while cutting greenhouse gas emissions and provides billions in investment. It also notes fuels blended with as much as 15 percent of ethanol have been authorized for use in cars build since 2001, although sales of the fuel are miniscule due to concerns about car engine warranties.
"The EPA has totally obliterated Big Oil's myth that the RFS is inflexible and unworkable. As in years past, the finalized annual requirements are a testament to the inherent flexibility that is the backbone of the RFS," said Bob Dinneen, President and CEO of the Renewable Fuels Association.
A "TEPID HALF-STEP"
In practice, however, many refinery executives worry that even if a crash into the "blend wall" next year is averted, another one may loom as the targets continue to rise.
The EPA had previously projected 18.15 billion gallons of renewable fuels being blended in 2014 from 16.55 billion gallons this year, with that amount rising to 36 billion gallons by 2022. In Tuesday's statement, which also formalized the 2013 targets, the agency promised to reduce both the "advanced biofuel and total renewable volumes" next year.
Refiner Valero said it wants an RFS that is "workable and fair".
"The RFS, with its RINs requirement, has created an uneven and unfair wholesale and retail fuel marketplace that arbitrarily picks winners and losers," said CEO Klesse.
Valero is among the hardest hit, with RIN costs at up to $800 million this year. Philadelphia's Rinaldi declined to say how much they were paying, but as a merchant refiner with limited blending and retail outlets it too is hurt. Among the winners: BP <BP.L>, which recently sold two big refineries.
Tweaking the rules a bit won't satisfy many in the industry, who have stepped up the fight in recent months.
"It's a tepid half step in the right direction, and a clear signal to (the U.S. Congress) to please legislate in this area," said Stephen Brown, vice president for federal government affairs at independent U.S. refiner Tesoro Corp <TSO.N>.
(Additional reporting by Cezary Podkul in New York Kristen Hays in Houston; Editing by Richard Pullin)