There’s a headline I bet you didn’t see coming, huh? We’re living in a time when the American energy sector is surging and becoming a dominant force not only domestically, but globally as well. There’s a president in the White House who is loosening up restrictions on drilling as we speak. Older pipeline projects are finally being finished and newer ones are kicking into gear. That includes Pennsylvania where, as we recently discussed, the Mariner East II Pipeline may soon be bringing even more product into the Philadelphia/New York region for processing and shipment.
So with all of those conditions in place, how in the world could the Philadelphia Energy Solutions LLC refinery, one of the biggest around, be filing for bankruptcy? That must be a mistake, right? But it’s not. (Bloomberg)
Philadelphia Energy Solutions LLC, owner of the largest oil refinery serving the New York Harbor gasoline and diesel market, filed for Chapter 11 bankruptcy protection.
The company, a joint-venture between The Carlyle Group LP and a subsidiary of Energy Transfer Partners LP, filed a petition Sunday in U.S. Bankruptcy Court in Delaware. Chief Executive Greg Gatta said in a memo obtained by Bloomberg News that the company had a prepackaged reorganization plan and cited the more than $800 million it paid since 2012 to comply with the U.S. government’s Renewable Fuel Standard as a key factor for the decision.
The company’s debt is between $1 billion and $10 billion, it said in its filing, without providing further details in its initial petition.
How did that happen with energy products being so plentiful? The easy answer is provided by the company which owns the refinery. It’s not one of the newest designs so they’re not equipped to process biofuels and blend them into gasoline. And because of our old friend the Renewable Fuel Standard, that means that the refinery has to purchase government mandated RIN credits (Renewable Identification Number) in order to legally operate.
In case you’re wondering how much those RIN credits cost these days on the bizarre market which has grown out of the government mandate, Philadelphia Energy Solutions had to spend $217M in 2017 for them. That was their second highest operating cost, adding up to more than any other expense besides crude oil to process, and more than twice their total salary for the workforce. At the same time, as I mentioned above, an abundant oil supply is something of a double edged sword. High supply and steady demand means lower prices, so the government was jacking up their costs massively just as profits were getting slimmer.
Was there anything that could have been done? Of course. We were first saddled with this program by George W. Bush, much to our dismay. Then it really kicked into high gear under Barack Obama. But there was always hope that perhaps Donald Trump could help. Yes, he had sworn fealty to King Corn in Iowa when he was on the campaign trail, but at least some relief could have been offered. But when the EPA quietly floated a trial balloon about possibly scaling back the RFS standards a bit, Trump shot the idea down. More recently, several state governors, including Pennsylvania’s, pleaded with the President to grant waivers to some of the hardest hit states. Once again, Trump denied the request. And now Philadelphia Energy Solutions has entered Chapter 11.
Bush started this. Barack Obama made it worse. But Donald Trump had multiple chances to do something about it and he has refused. This one lands on his plate as far as I’m concerned.