UNDER PRUITT, AGENCY GIVES ETHANOL WAIVERS TO REFINERIES 'LIKE TRICK-OR-TREAT CANDY'

WASHINGTON - One morning last year in March, Scott Pruitt, the Environmental Protection Agency administrator, welcomed into his office George Damiris, the CEO of Dallas-based refining company Hollyfrontier.

Damiris was a longtime critic of the costs imposed on oil refineries to comply with a federal mandate that ethanol be blended into the nation's fuel supply, and according to Pruitt's schedule for the day, the conversation would cover familiar territory of the ethanol debate. Except this time, just one month after Pruitt was sworn into office, the refining CEO would get at least some of his wish to be rid of the blending requirement.

Under a little-used federal law designed to prevent small refineries from closing due to financial hardship, the EPA has handed out exemption after exemption to refineries in Texas and across the country, relieving them of compliance with an ethanol mandate that the oil industry has fought to repeal for years, but President Donald Trump swore to protect it when reaching out to Midwestern voters on the campaign trail.

So far, the EPA has exempted roughly 20 refineries from their 2016 biofuels requirements and at least 25 for 2017, with many more under consideration, according to the EPA.

Exactly how much impact the exemptions will have on the nation's ethanol market remains unclear. But one ethanol lobbyist estimated it could work out more than 1 billion gallons in lost demand - about 7 percent of the 2017 ethanol requirement. Already, the exemptions are roiling the market for the renewable fuel credits, known as RINs, that refiners must buy if they don't blend ethanol themselves..

"Nobody knows how many credits are going to get injected back into the marketplace because they are no longer needed for compliance," said Geoff Cooper, executive vice president at the Washington-based Renewable Fuels Association. "It feels like a backdoor."

The exemptions to the mandate are granted under a provision within the biofuels law Congress passed in 2005, which allows the EPA to exempt refineries that produce fewer than 75,000 barrels per day if they can show the biofuels obligation causes them a "disproportionate economic hardship," said Jeff Holmstead, a former top official at the EPA who now represents oil refiners as an attorney at the Houston law firm Bracewell.

Past administrations granted limited waivers, usually working out to a fraction of a percent of the total ethanol mandate. But since Pruitt took over the EPA last year, officials have signaled to their industry counterparts that if they asked for waivers for their smaller refineries, the request would be granted, said an executive for one refining company, who requested anonymity due to the sensitivity of the issue.

"Anyone with a brain submitted an application," the executive said. "The EPA was handing out those exemptions like trick-or-treat candy."

A spokesman for the EPA said the agency "follows a long-standing, established process" to determine which refiners qualify as exempt and "the criteria used to grant waivers has not changed since previous administrations."

Among companies that have received waivers are Hollyfrontier, for two refineries in Utah and Wyoming; the U.S. affiliate of the Israeli conglomerate Delek, for refineries in Arkansas and Louisiana; and Indianapolis-based Calumet Specialty Products Partners, for refineries in San Antonio and Louisiana. San Antonio-based Andeavor, formerly known as Tesoro, has also received exemptions for its three smallest refineries, Reuters reported Tuesday, citing anonymous sources.

For a refinery that does not blend its own ethanol, forcing it go onto the financial markets for blending credit, which have spiked in recent years, amounts to a windfall.

In a filing with the Securities and Exchange Commission in February, Hollyfrontier, which earned more than $900 million in profits last year, said exemptions on refineries in Utah and Wyoming had translated to a cost savings of $57.8 million. Likewise, Delek, which earned a $320 million profit last year, reported in March an exemption for one of its refineries in Arkansas saved them $47.5 million.

The rush of exemptions throws another curveball into a yearslong debate over ethanol, which has increasingly cut into the nation's gasoline demand and the oil industry has long fought to repeal. Tensions heightened earlier this year when the Philadelphia Energy Solutions refinery, the largest on the East Coast, declared bankruptcy, blaming the high costs of buying RINs - a connection Pruitt himself has frequently repeated.

Midwestern politicians, who for years have fought to protect the ethanol sector vital to the corn farmers in their states, expressed outrage this week that large and profitable companies are receiving exemptions under a provision they argue was designed to stop small refineries from going bankrupt.

"If refineries are being allowed to retroactively get out of the renewable volume obligations the EPA assigned them in November, that fundamentally undermines the Renewable Fuel Standard," Sen. Chuck Grassley, R-Iowa, said in a statement. "There are legitimate questions being raised about whether the EPA is following the law with these exemptions."

The increase in exemptions granted by the EPA follows a ruling by the 10th U.S. Circuit Court of Appeals last year that the agency, under the Obama administration, had erred in refusing to grant exemptions for two Wyoming refineries owned by Sinclair Oil Corp.

The court found that the agency's demands that refineries prove they were at risk of closing down to receive an exemption was not in keeping with the biofuels law Congress passed in 2005.

"If you show that you're facing disproportionate costs under the (Renewable Fuel Standard) program compared to other refineries, EPA has to exempt you from the program. That's what the Sinclair decision is all about," said Holmstead, who represented Sinclair in the case.

Since Trump came into office last year, he has worked to find a balance between aiding an oil industry he believes can help grow the U.S. economy while keeping happy an ethanol sector that is hugely influential in the Midwestern states, which the Republican Party hopes to carry in the November midterm elections.

In a series of meetings with Sen. Ted Cruz, R-Texas, and Grassley, Trump attempted to broker a compromise in which the blending credit costs for refineries would be reduced, but ethanol producers would not see demand affected. But so far, no solution has been reached.

Instead, Grassley and other Midwestern politicians were demanding Wednesday that Pruitt explain why he granted a waiver to Andeavor, which earned $1.5 billion in profit last year.

"I cannot understand how a company with those profits last year could possibly claim economic hardship,"said Rep. Dave Loebsack, D-Iowa. "If true, these actions constitute a direct attack on the RFS and on Iowa farmers."

james.osborne(at)chron.com

twitter.com/osborneja