Periodically, ActTesoro.com provides updates on our current policy priorities. Congress and the Administration are working through various national issues. Those highlighted below are three that are “mission critical” to our business and customers.

Renewable Fuel Standard

In 2007, Congress expanded the Renewable Fuels Standard (RFS) to require 36 billion gallons of conventional (corn) and advanced (cellulosic, biodiesel, and “drop-ins”) biofuel to be blended into America’s gasoline and diesel fuel supplies by 2022. Congress hoped that turning food, plants, and other bio-sources into alternative fuels would help achieve US energy independence and improve the environment, but it’s not working out that way. Conventional corn ethanol usage creates numerous problems and commercial supplies of advanced biofuels simply don’t exist due to technology shortfalls. The RFS was based on incorrect assumptions, has not achieved its stated objectives, and is now recognized to be hurting consumers at the grocery store and the gas pump.

Academics, consumer advocates, environmentalists, and economists are joining drivers, off-roaders, farmers, food providers, charities, recreational boaters, and many others in objecting to the costly economic effects, environmental harm, increased food prices, and harmful engine problems caused by the RFS. Tesoro supports efforts in Congress to repeal the failed Renewable Fuel Standard. Please visit smarterfuelfuture.org to learn more about what’s wrong with the RFS, and what needs to be done about it.

Tax Reform

2011 tax collections, before refunds, drew $2.36 trillion dollars from our economy. That same year, the cost of regulation was estimated to be $1.82 trillion. Between 2009 and 2011, the US Office of Management and Budget estimated the added cost of just new regulations to be $39.3 billion; most of which were proposed by USEPA (see ActTesoro’s Regulatory Tidal Wave chart for examples). The federal government issued more than 175,000 rules, requiring 169,694 pages in the 2011 Code of Federal Regulations. Of these, nearly 25,000 were about the environment. Clearly, something is off kilter.

Few like the current structure and impact of America’s tax code. Many hope for a flatter, fairer, and more transparent system. Federal deficits, debt, and spending are driving Congress’s interest in tax reform. American companies already face some of the world’s highest corporate tax rates. The domestic oil and gas sector, including Tesoro, pays one of the highest effective tax rates compared to other US sectors. While Tesoro welcomes efforts to reform the federal tax code, we oppose efforts that would discriminate against our industry and other American manufacturers, especially if the efforts simply increase the funding of Washington’s already bloated bureaucracy.

Climate Change

Although Congress shows little appetite for another climate change debate, the US Environmental Protection Agency (USEPA) is using its considerable power to address climate change through more and more regulations. Regulations impose costs on manufacturing and these costs ultimately affect all Americans by driving up the price of goods and services.

Tesoro recognizes the public’s concerns related to climate change. However, Tesoro also appreciates the need to encourage national economic and energy security through domestic energy development and reliability which is already driving America’s manufacturing renaissance. USEPA should not be jeopardizing that renaissance with regulations that are neither market-based nor built upon sound science capable of yielding real societal benefits. If climate change is to be addressed successfully, it will necessitate meaningful worldwide participation. Within our own country, improved transparency in USEPA’s rulemakings and fuller, better-balanced cost/benefit analyses – which are seen by close observers as wanting – would be an improvement. Fundamentally, the burdens of addressing climate change cannot unduly rest upon American citizens or businesses.

Thank You!

Act Tesoro appreciates the opportunity to keep you informed on some of the biggest issues facing our company, industry, and customers. Thanks for your interest!

Following a largely ‘status quo’ election in November, which placed all the key political players effectively back in eerily-familiar roles, the key difference going forward appears to be a more aggressive White House. This may reflect a desire to burnish a historical legacy for President Obama. It may also reflect recognition of his limited time to accomplish second term goals in pursuit of that objective. For the energy industry generally, and transportation fuels manufacturers specifically, 2013 promises to be a challenging year. Onerous mandates, a growing web of tightening regulations on operations, and discriminatory treatment through the federal tax code will likely be part of this mix.

The purpose of ActTesoro is to inform and educate our employees and customers on the policy issues affecting our business and to foster involvement with our advocacy efforts in this regard. As Tesoro engages Congress and the Executive branch on these issues, we will occasionally solicit your assistance in letting decision makers know your opinion on these issues.

The following is a short and far-from-exhaustive list of issues we plan to engage on in the coming year:

The Role of Renewable Fuels

The growing list of problems and concerns with the current U.S. Renewable Fuels Standard (RFS) is roiling many Americans, and propelling bipartisan interest on Capitol Hill to reform this program. The recent federal court’s rebuke of USEPA’s overreach on cellulosic ethanol, and the growing public alarm over the potentially damaging effects of higher ethanol-blends in gasoline supplies are inspiring more and more Americans to petition Congress to rethink RFS excesses. It is no longer just the oil industry raising these concerns; sectors expressing concerns now include virtually the entire agriculture community, food processors and feedstock manufacturers, consumers, shippers, vehicle and engine manufacturers, sportsmen, state and local elected officials, and fuels manufacturers and marketers. The US House will likely lead the charge in revisiting the RFS and many observers fervently hope that the Senate will follow.

US EPA’s Tidal Wave of Regulations

It is apparent that 2012’s relative lull in major USEPA rulemakings will very likely be replaced with a host of aggressive new proposals and actions. In fact, USEPA has signaled that 35 major new regulations will be finalized or proposed in 2013. These will likely include new greenhouse gas (GHG) emissions rules for new and existing power plants that would become effective in the next two years. USEPA’s pending Tier 3 fuel standard to curtail further the already greatly-reduced sulfur content of gasoline is expected by late February, and to become final by the end of this year. Previously-delayed proposed National Ambient Air Quality Standards (NAAQS) for ozone are expected in mid-2013. GHG emissions rules for refineries are likely to follow toward the end of 2013 or early 2014. Putting aside the arguments pro and con on each of these rules, there is no dispute that USEPA’s ‘tidal wave’ constitutes an unprecedented regulatory intervention into the fuels manufacturing and other sectors. The ensuing regulatory compliance will be costly and will increase consumer costs at the pump.

Comprehensive Federal Tax Reform

Neither individuals nor corporations feel good about the current structure and impact of our federal tax code. Certainly, everyone would prefer a flatter, fairer, and more transparent system than what we currently have. The increased focus on federal deficits, debt, and spending are combining to also compel congressional interest in comprehensive tax reform. American companies already endure some of the highest corporate tax rates in the world. The domestic oil and gas sector, including Tesoro, pays one of the highest effective tax rates compared to other US sectors. While Tesoro welcomes an honest debate about all aspects of the federal tax code, we will not stand idle while some in Washington propose to discriminate against our industry through various “tweaks” to the Code in pursuit of yet more spending money for the federal bureaucracy.

Climate Change

The complex topic of climate change and associated issues face every actor in the energy sector. Tesoro recognizes the concerns of the public related to climate change and is committed to investing in initiatives that drive energy efficiency as well as technological developments of alternative fuel sources. Tesoro does, however, view global climate change in the broader context of the national economic security concerns of the U.S. and believes that policies designed to address this global challenge must not undermine these concerns. The President has recently indicated that addressing climate change will be a priority of his administration and that may mean through more aggressive regulation of GHG emissions by his USEPA. We intend to be very proactive in those policy discussions by insisting on greater transparency in the rulemaking process and requiring real cost/benefit analysis coupled with an appreciation for the fact that any solution must ultimately not place the burden solely on US citizens or businesses.

An Assessment of the Economic Consequences of the Renewable Fuels Mandate

• Under U.S. law, U.S. petroleum refiners and other so-called obligated parties must blend ever larger volumes of renewable fuels into the U.S. gasoline and diesel fuel supply. The program is known as the Renewable Fuel Standard (RFS).
• Corn ethanol is not mandated under the RFS. However, 98% of “conventional biofuels” produced in the U.S. and blended into gasoline are derived from corn, thus creating a de facto mandate for corn ethanol.
• The RFS mandate for conventional biofuels s set to rise from 13.2 billion gallons in 2012 to 15 billion gallons in 2015. With the additional mandate for advanced and cellulosic biofuels, the total blending requirement rises to 36 billion gallons by 2022.
• The U.S. Environmental Protection Agency (EPA) administers the RFS program and is the only U.S. agency with the authority to waive or delay implementation of volumetric mandates for renewable fuel blending into the gasoline and diesel pools.
• In response to concerns over reductions in corn production from the widespread drought, five state governors have petitioned the EPA to either reduce or waive the RFS mandates and nearly 200 members of Congress (from both the Senate and House) have publicly announced their support for a waiver.
• The EPA announced on August 20, 2012 that it will accept comments for 30 days on the governors’ waiver request.
• The EPA is expected to act on the requests before November 13, 2012, but the agency’s likely response, if any, is unknown.

U.S. Corn Harvest Down 28%

• Drought throughout much of the U.S. farm belt is expected to severely reduce the 2012 corn crop. The U.S. Department of Agriculture (USDA) in June 2012 predicted a record 14.79 billion bushels of corn for the current harvest, but their forecast was revised down to 10.73 billion bushels in September 2012.
• Poor expectations on corn harvests are now setting all time price records with corn rising above $8 per bushel.
• Ethanol is currently blended into the gasoline pool at 9.7% concentration and blending volumes plateaued in 2010. But volumetric requirements under the RFS will soon take ethanol past the 10% “blendwall.”
• At that time, the gasoline pool will be completely saturated by ethanol at virtually 10% concentration, carryover RINs (renewable identification numbers) will be exhausted,
• ….there is a distinct risk that the blendwall will be breached in 2013.
• Unless the blendwall is pushed off by several years, obligated parties will continue to face a strong economic incentive to continue blending ethanol at up to 10% concentration and acquire RINs in the current period to apply to future obligations.
• Ethanol producers have called for no revisions in the mandate for blending of conventional biofuels into the transportation fuel supply.

EPRINC’s findings are as follows:

• A near term waiver of blending requirements (6 months to 1 year) would have little effect on corn demand for the production of ethanol. Obligated parties would still have to plan for RVO compliance once the waiver ends. Blending would still have to occur at high levels now, as obligated parties would want to acquire RINs to prepare for the high (and future) cost of crossing the blendwall. Refiners will also need time to adjust their gasoline yields in response to lower ethanol production. A longer term waiver (2-3 years) at some level at or below the blendwall would allow for a proper assessment of the nation’s crop situation, provide end-users with a stable planning environment, and permit refining operations to adjust fuel output. Such a waiver would likely reduce corn prices, providing economic benefits in the form of feed and food prices, and would reduce the risk of a price spike in gasoline as obligated parties begin blending ethanol at levels above 10% of the gasoline pool.
• There are no low-cost solutions for marketing renewable fuels into the transportation fuel supply in the near-term at levels above 10% of the gasoline pool.
• So called higher ethanol blend options, such as E85 (70-85% ethanol blends for flex fuel vehicles) have failed to achieve market success due to their high cost, poorer mileage performance relative to gasoline, and lack of availability. EPA has recently approved E15 for model year 2001 and newer light duty vehicles. E15, however, faces a large number of infrastructure, liability, and cost issues, all of which will limit widespread adoption. Auto manufacturers have not provided warranties for non-flex fuel vehicles using so-called E15 blends.
• By-product production of feed from ethanol production, DDGS, has not substantially lowered the cost of raising livestock in the United States. The ethanol industry purchases approximately 40% of the U.S. corn crop and is the largest purchaser of corn in the United States. Even when DDGS volumes are returned to the livestock feed supply chain, 30% of U.S. corn production is consumed for fuel production.
• Despite the droughts and record prices for corn and other crops, the RFS has ensured that billions of bushels of corn and soy are set to be converted to fuels which offset less than 5% of the nation’s petroleum fuel supply. The U.S. refining industry could make up the loss of all biodiesel and 400,000 bbl/d of ethanol production by adjusting gasoline yields within their historical 10 year range while remaining a net exporter of distillate fuel. The additional fuel production from refiners would require both adequate time to make the adjustments and an expectation that government policy would not impose long-term uneconomic blending requirements, i.e., blending at levels above 10% of the gasoline pool. As stated above, EPRINC’s assessment is that ethanol blending would continue at or above 400,000 b/d even in an environment free of blending mandates.