UPDATE 1-U.S. refiners may boost gasoline exports on ethanol rule-Lyondell

Wed Mar 13, 2013 7:11pm GMT

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HOUSTON, March 13 (Reuters) - U.S. refiners may be forced to boost gasoline exports if the government does not revise the country's ethanol requrements, a refining executive said on Wednesday.

Faced with a spike in ethanol credits that gasoline producers must purchase to stay in compliance with federal renewable fuels requirements, refiners could be forced to export more gasoline, shrinking the supply for domestic consumption. Gasoline prices at the pump last week hit the second highest level on record for this time of year.

"In the end, you'll see more people exporting more gasoline," said Kevin Brown, senior vice president of refining at Lyondell Basell Industries NV during a presentation to Wall Street analysts. "That will dry up the gasoline market."

Under the Energy Independence and Security Act of 2007, exported gasoline does not need to be blended with ethanol. The act requires producers of petroleum-based fuels like gasoline to blend increasing volumes of renewable fuels - such as ethanol and biodiesel - into gasoline and diesel fuel each year. The level increases every year.

But U.S. demand for gasoline has been steadily declining in recent years, meaning producers would have to blend higher and higher volumes of ethanol into each gallon of gasoline to be in compliance with the requirement.

Refiners are reluctant to increase ethanol content in gasoline beyond 10 percent because of potential liability for breaching levels deemed safe for older vehicles by automakers and the U.S. Environmental Protection Agency.

If producers fail to reach government targets for ethanol, they must buy the increasingly expensive credits, and that cost is leading to higher fuel prices.

Refiners call the dilemma "hitting the blend wall" as they are limited by restrictions to add no more than 10 percent ethanol to a gallon of gasoline, but are required by another rule to blend more than 10 percent ethanol or provide the RINS.

The ethanol industry argues that the oil industry is driving up gasoline prices and the prices of ethanol credits, or Renewable Identification Numbers (RINs).

RINs for 2013 jumped to over $1.10 a gallon this week from 7 cents early this year, and were trading around 90 cents on Wednesday.

The Renewable Fuels Association said on Tuesday that if the oil industry would blend at the higher 15 percent rate allowed by the EPA, gasoline prices and RIN values would slide.

Refiners are hoping to see the EPA ease the ethanol requirement. Lyondell's Brown said he expects the federal government will provide relief for refiners soon.

"I think ultimately relief is in the offing," he said. "If it doesn't, I think the market will rebalance."

Refiners or blenders that meet those targets can sell surplus RINs on the market as credits. Concerns are growing about supplies of RINs for next year will be even tighter, as the blending requirement increases even more. Some producers have stockpiled RINs from previous years to help stay in compliance.

Brown said Lyondell, which operates a 268,000 barrel per day (bpd) refinery in Houston, was keeping up with the RINS the company thinks are needed, but is not trying to stockpile the credits.

"We're not trying to get ahead of ourselves," he said.

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