The percentage depletion allowance for oil and gas production is generally available only to independent producers or royalty owners. The major integrated oil companies (ExxonMobil, Chevron, ConocoPhillips, etc) have not had a percentage depletion federal income tax credit or deduction for many years now. See IRS Publication 535 @ for additional information. Cost depletion is available based on the cost of the depleteable asset acquired much the same as depreciation for equipment, machinery or buildings.
Currently, it is my understanding, ethanol producers receive a direct government subsidy for every gallon of ethanol produced in an attempt to make the cost compatable with the cost of a gallon of gasoline which receives no subsidy.

October 26, 2010

RFS2 Will Require E15 to Break Blend Wall, Says
Marathon Executive

Chicago – The Renewable Fuel Standard will require the blending of higher than E10 blends such as E15 recently okayed for some cars by EPA. So says Jerry Morehart, commercial development manager for Marathon Petroleum Corp. speaking to OPIS’ 2nd Annual RFS2 & RINs Forum here recently.
RFS2 calls for 12 billion gallons of conventional biofuels (mainly ethanol) to be blended into gasoline this year and 12.6 billion gallons next year. The Department of Energy’s short-term energy outlook forecasts ethanol use will be 13.7 billion gal/year next year, which would require 95% of the nation’s gasoline to be mixed with 10% ethanol, Morehart noted.
Gasoline demand is only enough to support about 12 billion gal/year of ethanol blending. “We’re almost at the saturation point now,” Morehart said. “There’s not much room to grow ethanol placement.”
That means the physical “blend wall” will be hit next year, putting RFS2 off the rails, he said. Surplus Renewable Identification Numbers (RINs) carried over from 2010 “can buy additional time before the blend wall becomes a compliance issue,” Morehart said. However, if blending economics aren’t attractive in the near term and RINs are relatively cheap that could cause a drop off in ethanol use and a quicker drain on surplus RINs, he said. In that scenario, the blend wall becomes a more urgent compliance worry,
he added.
If the Volumetric Ethanol Excise Tax Credit of 45cts/gal for ethanol isn’t renewed by Jan. 1, that would further erode blending economics, he noted.
Earlier this month, EPA okayed E15 use in model year 2007 and newer cars. The agency signaled that it would likely approve E15 for model year 2001 and newer vehicles by the end of the year, if the testing warranted approval.
However, refiners and other obligated parties under RFS2 shouldn’t expect E15 to come riding to the rescue,Morehart said. Technical and commercial obstacles stand in the way, he noted, including: the need for Reid vapor pressure waivers to accommodate E15 higher oxygenate content; the need for a change to the base hydrocarbon formulation; state and ASTM spec issues; compatibility issues with equipment, Underwriters’ Laboratory certification of pumps, insurance, etc.; the expense of offering both E10 and E15 at a retail site beyond those issues that can be solved with a blender pump; labeling and price discounting needed for E15; and split waiver for auto fleet (2007 and newer only) could mean defective product liability, misfueling and
reduced demand.
“Time and money can solve these issues, but the current RFS requirements are too much, too soon,” Morehart said.
Similarly, widespread use of E85 is limited by the small percentage of the fleet that are flex-fuel vehicles and by equipment, pricing and energy loss issues, he added.
Also, the U.S. biodiesel market is heading for a “train wreck” as economic hardship has made it impossible for producers to make enough of the biofuel to meet federally mandated blend levels, Morehart added.
RFS2 calls for 350 million gallons of biodiesel to be blended this year. However, “there’s not enough coming,” said Morehart. The expiration of the $1/gal federal blend credit combined with high feedstock costs and tight credit markets led to the shutting in of much of the U.S. biodiesel industry’s 1 billion gal/year capacity.
Although it’s cheaper now for obligated parties to buy RINs than to purchase wet barrels of biodiesel, “that’s not sustainable.

There won’t be enough,” Morehart said. “By the time RINs are priced high enough to spur more investment and production, it’s too late. That’ll take two years. The timelines aren’t lining up,” he added. 2010 Biomass-based diesel RIN credits are currently selling for about 56cts each.


October 26, 2010
USDA Secretary Defends E15 Approval Decision in
Editorial Response

USDA Secretary Tom Vilsack believes a recent Wall Street Journal editorial that was critical of ethanol was inaccurate and "sidesteps the critical role the 'blend wall' decision will play in building a sustainable green economy in America," according to an editorial response printed this morning.

In an Oct. 18 editorial entitled "The Ethanol Bailout," the Wall Street Journal said the recent EPA approval of up to 15% ethanol blends in some vehicles was politically driven. "So the EPA decided that more ethanol should be mixed with less gas, lifting the [blend level] cap to 15% for model years
2007 and later, or about one out of seven cars and light trucks currently on the road. The decision came in the nick of time for the ethanol industry, which is at market saturation and producing a glut that the government is not requiring anyone to buy. ... We might think this was a play to reprise cash for clunkers, if this announcement on the eve of the election wasn't such a transparent exercise in Corn Belt pandering," the editorial explained.

"The Energy Department's overall safety testing is continuing [for vehicle models 2001-2006], but the EPA released the results for newer models early because -- well, let's just say it wasn't trying to fulfill President Obama's promise to put science ahead of politics," the editorial concluded.

In response, Vilsack defended EPA's E15 decision, saying it "is scientifically sound and follows a comprehensive review of extensive testing and other available data on E15's impact on engine durability and emissions.
What's more, it will help ensure that the existing corn ethanol market acts as a successful stepping stone to a national biofuels industry that is creating jobs in every corner of the country using regionally appropriate feedstocks grown by American producers," he wrote in an editorial this morning.

"This week, I am outlining the Department of Agriculture's strategy to assist in developing a biofuel industry powered by feedstocks produced in every corner of the country," Vilsack continued, after announcing the strategy in a speech last week to the National Press Club. "We are coordinating the best science, technology and infrastructure solutions to help advance profitable biofuels produced from a diverse range of feedstocks. That includes addressing some of the issues raised in your editorial," he wrote, which includes adding blender pumps, tanks and labels to stations to allow for higher ethanol blends.

"Don't forget, the petroleum industry receives billions of dollars in tax breaks each year from the federal government," Vilsack concluded.

Renewable Fuels Association (RFA) President Bob Dinneen -- who was cited in the Wall Street Journal's editorial -- also responded to the editorial, surprisingly agreeing that EPA's decision "is not based on all the science. If it were, the EPA would have allowed the use of 15% ethanol in a gallon of gasoline for every vehicle on the road," he wrote in an Oct. 20 response.

Additionally, "[t]he desire to use more domestically produced renewable fuels isn't driven simply to increase market share or stock prices of ethanol producers [as the editorial implied]," Dinneen continued. "It is predicated on the need to reduce the $1 billion of wealth Americans transfer to other nations on a daily basis. It is predicated on the need to lessen American exposure to hostile and unstable regions of the world by reducing our reliance on imported oil. It is predicated on the need to develop a domestic industry that creates jobs that cannot be sent to China or India. ... The only thing standing in the way are the entrenched interests hell-bent on protecting the petroleum status quo," he added.


October 14, 2010
Retailers Remain Concerned About E15 Misfueling

Despite the proposed labeling rule that EPA issued yesterday to help preventmisfueling of higher ethanol blends in vehicles not approved for the fuel, petroleum retailers remain concerned "that there is not true protection" for their industry, according to an official with the National Association of Convenience Stores (NACS).

The comments come in response to Wednesday's announcement that EPA approved
the use of up to 15% ethanol in the first of two vehicle sets -- those for 2007 and later. By the end of the year, EPA plans to issue its decision on the second vehicle set -- those for 2001-2006.

"EPA's decision to allow the use of E15 in certain vehicles does nothing to remove retailers' obligations to ensure that all of their equipment is lawfully certified to store and sell this product," said NACS Vice President of Government Relations John Eichberger. "Further, limiting E15 use to only vehicles manufactured since 2007 could expose retailers to significant liability risk if a consumer were to fuel a non-approved engine with E15," he added.

To that end, EPA also proposed yesterday a labeling rule that aims to prevent misfueling. "This would include a requirement that fuel industries specify the ethanol content of gasoline that they sell to retailers [and] there would also be a quarterly survey of retail stations to help ensure their gas pumps are properly labeled," explained EPA Assistant Administrator for Air and Radiation Gina McCarthy, speaking on a conference call with reporters yesterday. "Based on today's decision, the label would visibly and clearly state that the pump contains E15 and that the fuel is for use only in model years 2007 and newer cars and light duty trucks," she noted.

"[T]he labeling rule does attempt to make sure that we have the label that provides clear direction to consumers ... and still providing some meaningful information to them so they can make clear decisions," McCarthy added, noting that "a rigorous education and outreach program is something that needs to be rolled out" on this effort.

"NACS is concerned, however, that misfuelings could be both accidental and intentional and that labels may not provide the necessary protections for retailers to limit potential liability," Eichberger continued. "When regulations phased out lead from gasoline in the early 1980s, consumers went to extraordinary measures to bypass the fill pipe-nozzle restrictions that were designed to prevent misfueling. EPA then punished retailers for not physically preventing self-service consumers from introducing leaded gasoline into
unleaded-only vehicles," he noted.

"While EPA may not enforce against retailers who properly label, there is nothing protecting the retailer from a private right of action for allowing a self-service consumer to misfuel, nor is there any protection against a consumer who may seek to hold the retailer liable for any equipment damage or warranty invalidation that may occur as a result of the misfueling," Eichberger told OPIS after yesterday's announcement. "NACS believes that labeling is the only reasonable approach to informing the consumer and mitigating the incidence of misfueling, but we acknowledge it is not going to prevent misfueling. We would hope that Congress would see fit to ensure that the retailer and others in the supply chain would be absolved from responsibility if the consumer
ignores the labels and misfuels," he added.

NACS is among several groups supporting legislation (H.R. 5778) that would allow existing fueling equipment to be deemed compatible with any future- approved fuels,
as well as protect retailers in the case of misfueling. Other groups who have publicly supported the bill include the Renewable Fuels Association, the Society of Independent Gasoline Marketers of American, the Petroleum Marketers Association of America
and NATSO.

EPA will accept public comments on its labeling proposal for 60 days once it is published in the Federal Register and is also holding a public hearing on Nov. 16 at the Millennium Knickerbocker Hotel in Chicago at 10 a.m. CST.


October 13, 2010
EPA Approves E15 Waiver for 2007 and Newer Vehicles

After two delays and nearly a year-and-a-half of fierce lobbying, EPA has officially approved the use of higher ethanol blends up to 15% in 2007 and later model vehicles, the agency announced this afternoon.

It was the first of two decisions, with the agency expected to rule by the end of the year on whether to expand E15 approval to 2001-2006 model vehicles.
However, EPA made clear this afternoon that it plans to limit its approval in the meantime to only 2001 and later model years, a decision which made the agency's initial E15 approval bittersweet for the U.S. ethanol industry.

The approval for 2007 and later vehicles could apply to 43 million vehicles, or 18% of the current light-duty vehicle fleet, according to estimates by ethanol group Growth Energy.

"Thorough testing has now shown that E15 does not harm emissions control equipment in newer cars and light trucks," said EPA Administrator Lisa Jackson. "Wherever sound science and the law support steps to allow more home- grown fuels in America's vehicles, this administration takes those steps," she added.

"The decision to grant the waiver was reached by Secretary Jackson after a review of DOE's extensive testing," noted EPA Assistant Administrator for Air and Radiation Gina McCarthy, speaking on this afternoon's press conference call with reporters. "E15 is safe to use" with 2007 and later model year vehicles. "For other model years, we will need more time to gather and assess the necessary data," she added.

"We followed the law, we looked at the test results and came to a decision,"
McCarthy continued. "It was an appropriate decision for the agency to make under ... the Clean Air Act," she added.

The E15 waiver was submitted in March 2009 by Growth Energy and numerous other groups. Growth Energy praised today's news as "an important first step"
in the process. "Today's approval of E15 for newer vehicles is the first crack in the blend wall in more than 30 years, and proves what was laid out in Growth Energy's Green Jobs Waiver -- that E15 is a good fuel for American motorists,"
said Growth Energy CEO Tom Buis.

However, ethanol groups continue to be frustrated with EPA's bifurcated approach of approving the fuel blends for only two vehicle subsets.

"Extensive testing from government, industry and academia proves there is no reason to limit E15 to only 2007 and newer vehicles," Buis noted.

The Renewable Fuels Association (RFA) said EPA was "missing an opportunity"
by splitting its E15 approval. "EPA's scientifically unjustified bifurcation of the U.S. car market will do little to move the needle and expand ethanol use today," said RFA President and CEO Bob Dinneen. "Limiting E15 use to 2007 and newer vehicles only creates confusion for retailers and consumers alike.
America's ethanol producers are hitting an artificial blend wall today. The goals of Congress to reduce our addiction to oil captured in the Renewable Fuels Standard cannot be met with this decision," he added.

"While some will portray this partial E15 waiver as a major victory and others will suggest it is completely unworkable, the truth lies somewhere in between," explained American Coalition for Ethanol (ACE) Executive Vice President Brian Jennings. "ACE views it as a very small first step and we will work to try and make the best of it. While we are pleased EPA finally made a decision, restricting the use of E15 to 2007 model year and newer vehicles is inadequate and will not sufficiently move the demand needle for ethanol.  EPA should act swiftly to approve the use of E15 in all vehicles because this piecemeal approach shortchanges consumers who ought to have the choice to use
E15 in any vehicle," he added.

EPA is aware of the ethanol industry's requests to widen the E15 approval to other vehicle sets, but McCarthy told reporters that "no testing is available that would support such a waiver decision" on vehicle models before 2001.
However, she noted that today's decision "doesn't close the door to additional testing data moving forward."

Throughout the E15 waiver process, a diverse coalition of oil, engine, auto and environmental groups have repeatedly warned EPA not to approve higher ethanol blends until all vehicle testing was done. The American Petroleum Institute (API) reiterated those concerns this afternoon. "It is disappointing that the EPA did not wait until the testing process was complete to determine if higher levels of ethanol are safe," said API Director of Downstream Operations Bob Greco. "From data already gathered, use of higher ethanol in gasoline has revealed several areas of concern. EPA needs to make sure that a new fuel is safe for consumers. Rushing through this new fuel standard without complete research may be good politics but is bad public policy," he added.

"The large majority of today's vehicle warranties only cover gasoline with up to 10% ethanol," Greco continued. "More ethanol in gasoline could result in the voiding of customer warranties. The EPA also seems to believe that a label on the pump will keep consumers safe from misfueling, but the impacts of misfueling are unknown until the necessary research is completed," he added.

Similar comments came from the Alliance of Automobile Manufacturers, who noted that it "is very important that consumers have a positive experience with new fuels. We all want alternative fuels for energy security and other reasons, but it does not serve anyone -- not government, fuel retailers or even the ethanol industry itself -- to introduce a new fuel prematurely or in a piecemeal fashion. Automakers support E85 vehicles because we have 'hardened' or upgraded parts of the vehicle to accommodate greater amounts of ethanol, which can degrade rubber, plastic, metal and other materials. And we support E10. But the data is not all in yet on E15 or higher blends," the Auto Alliance noted.

Today's decision is not likely to result in an immediate boost of ethanol supplies, since retailers are reticent to offer the higher level blends until product liability and potential misfueling concerns are addressed.

To that end, EPA also unveiled today a labeling rule proposal that aims to prevent potential misfueling. The proposed rule would:

--Prohibit the use of ethanol-blended gasoline containing greater than 10 vol% and up to 15 vol% ethanol in vehicles and engines not approved for it;
--Require all fuel dispensers to have a label if a retail station chooses to sell E15, and seeks comment on separate labeling requirements for blender pumps and fuel pumps that dispense E85;
--Require Product Transfer Documents specifying ethanol content and RVP to accompany the transfer of gasoline blended with ethanol; and
--Require a national, quarterly survey of retail stations to ensure compliance with the labeling provisions.

EPA will accept public comments on its labeling proposal for 60 days once it is published in the Federal Register and is also holding a public hearing on Nov. 16 at the Millennium Knickerbocker Hotel in Chicago at 10 a.m. CST.