The Little-Known Energy Sector That’s Now in Trump’s Crosshairs

The Environmental Protection Agency (EPA), for better or worse, has huge influence over the U.S. energy markets.

So President-elect Trump’s nomination of Scott Pruitt as the new head of the Environmental Protection Agency (EPA) is understandably grabbing a lot of headlines.

For one, Pruitt has made no apology for his adamant opinion that the EPA – the very agency he’s set to lead – should be abolished.

But amid all that, another, even more important EPA matters has been buried…

A whole market sector is at risk.

Here’s how you need to protect your portfolio…

Ethanol is in the Crosshairs

Of course, major elements in Pruitt’s nomination itself will continue to make headlines. If he gets his way and the EPA is disbanded, he may be returning to Oklahoma (where he is currently Attorney General) in short order.

But there is another matter concerning the EPA which is far more important.

It involves an increasingly contentious practice in reporting the biofuel component put in gasoline.

Given the acrimony over regulations almost certain to happen as the top management of the EPA changes, the issues surrounding energy intelligence company Genscape may be the tip of an iceberg. Late last year, the EPA initiated procedures to revoke the company’s authority to verify biofuel credit compliance under Federal regulations.

Reuters reported on January 4 that Genscape will be contesting the action:

“Industry energy intelligence company Genscape said it will fight the Environmental Protection Agency’s efforts to revoke the company’s authority to verify biofuels compliance credits under the U.S. renewable fuels program.

The U.S. agency informed Genscape last week that it was seeking to penalize the company for failing to detect a massive fraud perpetrated by companies it was monitoring as part of its Quality Assurance Program, or QAP.

But Genscape disagreed in a written statement last week, saying it would oppose the EPA order.

“Genscape believes it acted responsibly by investigating concerns identified through the implementation of its approved QAP plan, by turning over the results of that investigation to EPA, and by assisting the DOJ (Department of Justice) in its successful pursuit of a series of criminal convictions,” Genscape said.

U.S. regulators discovered that Louisville, Kentucky-based Genscape verified millions of renewable fuel compliance credits that were fraudulently generated in 2013 and 2014 by two companies, Gen-X Energy Group Inc and Southern Resources and Commodities LLC.

Several people have been sentenced to prison and fined for the fraudulent schemes. No one from Genscape has been charged.

The EPA requires U.S. refiners to either blend biofuels such as ethanol into gasoline or buy credits – known as Renewable Identification Numbers (RINs) – from biofuel producers or blenders that are generated for every gallon of renewable produced.

Genscape, part of DMG Information, a division of Daily Mail and General Trust plc, tracks crude oil movements via pipeline and supply disruptions at refineries. It also verifies the authenticity of credits under the U.S. renewable fuel program.”

The real issue here, however, may well be the biofuels component requirement itself. Pruitt, the (likely) incoming head of the EPA, has been critical of the requirement. Meanwhile, independent refineries have regularly complained that the Renewable Identification Number (RIN) system creates problems and does not actually represent a valid national purpose.

On the other hand, the program has a number of proponents who argue that it has improved the composite of renewables on motor fuels.

Obviously, the continued requirement to use biofuels levels in the gasoline mix along with RINs has a major political component. Given that the largest volume of renewables in the mix comes from ethanol, its producers along with growers of corn and other sources of the ethanol, have a vested interest in continuing the program.

That has an immediate connection to intense, long-running lobbying efforts in DC. The ethanol industry has significant employment impact in red states such as Ohio, Iowa, and Nebraska, meaning that any attempt to get rid of the biofuels requirement will result in a political problem for the incoming Trump Administration and its pledge to increase U.S. employment.

But that is hardly the only issue…

Biofuels Are Now at Risk

Last August, mega investor Carl Icahn charged that the RIN system was discriminatory and called on the EPA to change the credit distribution to favor smaller refineries.

Icahn, unsurprisingly, is a major shareholder in CVR Energy Inc. (CVI), which runs small refineries that are laboring under current EPA policies.

Icahn also happens to be opposed the EPA’s whole approach to biofuels…

And has just been named a special advisor to Trump.

Genscape has 60 days to appeal the EPA decision. Well before then, however, the issue of fraudulent renewable fuel compliance credits may become the lever used to pull apart a much broader initiative.

Ethanol providers in particular, and renewable fuel advocates in general, may have a much more serious matter on their hands.

The RIN program, and the biofuels market itself, now seems under attack.

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