OPIS National Supply Summit October 22, 2015 Jess Hewitt, Speaker Houston, Texas

RIN Direction and Blending Options We will discuss the many reasons why the title of this presentation will have very little to do with predicting the direction of RIN values (Read the anticompetition clause)

Have you read the Renewable Fuel Standard?

I will try to help you make sense of the complex regulations to help you WORK SMARTER

RINS What are they? Renewable Information Number An alpha numeric code that tells us Who Produced it When it was Produced and batch numbers What kind of Product If it is still attached to the fuel

RINS: How they are made A RIN is created by the producer or importer of a renewable fuel that has been registered with the EPA Renewable Fuel Standard Each fuel has an assigned number of RINS that can be produced with each unit of measurement, liquid or gas One RIN is equal to 77,000 btu’s so ethanol has one RIN per gallon, other fuels are assigned more RINs per gallon due to higher heat content

RIN - Speak Attached/Assigned RIN: When produced, the RIN is attached to a volume of renewable fuel and the RIN is transferred to the next counterparty receiving the renewable fuel. PTD: Product Transfer Document, required format by EPA that notifies the next counterparty of the RINs transferred with the fuel. There is no set template but the format is dictated by the EPA

More RIN - Speak Separation Event: There are defined ways a RIN can be separated from the fuel. Can be as simple as ownership, blending or a qualified sale. Separated RIN: Once a Separation Event has occurred then the RIN can be separated and traded. K Code: The lead number of the RIN. Code of 1 is attached to fuel and Code 2 is separated. D Code: Classification of Renewable Fuel: 3, 4, 5 and 6 from Highest to Lowest GHG emissions, plus D Code 7 for cellulosic diesel.

D Codes: Of course it must make no sense that the larger D Codes indicate less emissions reduction, and you need more D6’s than D3’s; and just to confuse everyone we’ll throw in a D Code of 7 which is high emission reduction but you don’t need many of them, and in fact they may not even exist!

RVO, What is it? Renewable Volume Obligation: The amount of renewable fuel (counted by RINs) that is required of any person (Obligated Party) who: – Makes Gasoline or Diesel (refiners and blenders) – Imports gasoline or Diesel – Exports a renewable fuel RVO are calculated first in National gallons and then expressed in percentages of each renewable fuel category applicable to each obligated party.

I will let you know when we reach the end of the important part of this presentation Please Pay Attention from this Slide until the End of the Presentation I was told many years ago that my presentation length was to be just short of my audience’s attention span so I know I will lose some of you at this time. Please enjoy your coffee break.

Here’s where you get your money’s worth We cannot predict RIN prices, We can construct limits on the prices, downside and upside and If the market acts rationally then RIN prices should remain within limits Of course, markets are not always rational

RIN Price The Price of a RIN is made up of these elements: – Time Value: A RIN degrades in value over time, a more recent Vintage RIN should be worth more than a RIN from a previous year, – Exceptions: Invalid RINs may cause obligated parties to seek out the older Vintage RIN, or if a deficit in annual RIN production cannot be covered by new Vintage production.

More about Price Production Value (PV): This is the Minimum Value that a Producer must obtain to Break Even on Producing the Renewable Fuel. Example: Biodiesel production breakeven cost is $4/gallon, biodiesel is selling for $2.50/gallon leaving $1.50/gallon or if divided by 1.5 RIN/Gallon = $1.00/RIN (Assumes no tax credit is available) If credit is available then = $0.50/1.5 = $0.33/RIN So the credit is worth $0.67/RIN

PV If the PV is more than the market price of the RIN then Producers will face opposition to the full value of biodiesel and production should be reduced or stopped Obligated Parties will just buy the RIN and avoid the Renewable Fuel

More Price Factors Blend Value (BV): This is the Maximum value that a blender can pay to physically blend the renewable fuel into a refined product. Calculate this value as the refined product sales value less blending costs. Gasoline sells for $2.00/gallon less base gas cost $1.90/gallon less 2 cpg blending, So BV = $0.08/gallon divided by 9% (RIN %) = 88 cents/RIN

BV When the Price of RINs approaches Blend Value then demand for the RIN and/or the fuel will diminish as there are some market participants who are not obligated parties and actually act rationally (these are called Renewable Fuel Blenders)

Does Blend Value Vary? YES Blend Value varies by the category of RIN (D Code) being used. Take the previous example of 8 cents per gallon of RIN cost per gallon of Gasoline: – Cellulosic Value: $0.08/ = $135.00/RIN – Biomass Value: $0.08/.0141 = $5.63/RIN – Advanced Value: $0.08/.0161 = $4.97/RIN Does this matter to anyone? No

So How Much is the RIN Worth? If no RINs were produced, what is the first RIN worth? Blend Value plus Time Value If no gasoline was produced, what is the RIN worth? Production Value plus Time Value If the RVO were exactly equal to number of RINs produced then RIN Price would be Between Production Value and Blend Value

So you can’t really predict RIN Price? Economist Exceptions – If I knew how much gasoline and diesel was being produced, – And Imported – And Exported – And if I knew how much renewable fuel was being produced, – And imported, – And exported, Then I could tell you the price, – Within 2 standard deviations,

Price Shocks Many things can positively or negatively affect the Price of RINs in the short term: – Change of RVO or threat of change, – Tax Credits, in or out – Change of RFG Areas – Regulatory Fuel Changes (E15) – Export Markets (MEXICO)

Is there anything that I can control? Yes! You can control your cost of RINs by making your own RINs. – Next round of renewable products require refining or fractionation, inside the refining/blending system as – The end products cannot easily enter the blending or pipeline system – Refining the products makes a renewable gasoline, diesel and/or jet and you generate the RINs – Creates an Internal Supply of RINs

Can I do better? Yes! RIN values are always a function of your Blend Value, Increase the Blend Value, while keeping RIN costs in control and you make more

Example of Blend Value Margin Isobutanol (IBA): An Alcohol that can replace ethanol in RFG Areas, Blends at 12.5% into gasoline, IBA Costs $5.00/gallon, RFG 93 (12.5 IBA) sells for about $1.00 more per gallon than E10 Gasoline; net blend cost is 65 cents ($5 x.125), Blend Value is 35 cpg

Isobutanol Blending Consider the case of blending isobutanol into gasoline (CBOB/RBOB): Blend Value is extremely high at more than $0.35/gallon, or $3.88/RIN You buy RINs at 50 Cents, You earn the difference

Putting it all together RIN Values will tend to operate between Production Value and Blend Value Refine or Fractionate the Cellulosic Feedstocks to make your own RF and RINS Renewable Fuel Blenders act rationally so you need to watch them for signals of a change in direction for RIN prices If they are entering the market then expect RIN and/or commodity prices to firm, It they exit the market then expect RIN prices and/or the commodity to fall Watch for Price Shocks Monitor Non-Typical Markets like Mexico as they can influence demand for the blended commodity and they don’t care about the RIN Look for ways to sell high value blended fuels to “afford” RINs at levels higher than your competitors

You can continue to Work Harder Read the Regulations, or Call a Consultant Now what do I do? THANKS FOR ATTENDING!

“The World’s Largest Alternative & Renewable Fuels Consulting Group” 9903 Brockington Rd. Ste. 106 Sherwood, AR (501) Lee Enterprises Consulting, Inc. THANKS FOR ATTENDING!