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What Is California’s Crude CI Deficit & How Does It Affect Fuel Prices?

Posted by Jordan Godwin on Aug 10, 2020 8:00:00 AM
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California this year added a new layer of compliance costs under its Low Carbon Fuel Standard (LCFS) program, forcing so-called obligated parties – refiners and fuel suppliers – to scramble to adapt. 

The state upped the compliance ante this year after it found that the average carbon intensity (CI) of crude oil used in California rose in 2018.

That left obligated parties scrambling for a benchmark for what those new requirements would add to the price of gasoline and diesel in California.

Read what happened.

California’s Incremental Crude CI Deficit: A Brief History

In late 2019, the California Air Resources Board (CARB) alerted stakeholders that carbon in the crude oil used by state refineries over the previous three years exceeded a baseline carbon intensity (CI) for the first time in the history of the LCFS program.

Simply put, CARB found that the crude used in California refineries was too dirty.

To get into the nitty gritty, CARB determines the annual crude CI score using a rolling three-year average. The 2018 increased pushed that CI number to 12.14 gCO2e/MJ, above the 11.91 gCO2e/MJ baseline by 0.23 gCO2e/MJ.

So, beginning on Jan. 1, 2020, CARB imposed a penalty for the poor crude CI scores, raising the compliance target obligated parties had to meet this year to make up the difference. This is referred to as the “CI deficit.”

Remember, the LCFS program administered by CARB is designed to force obligated parties – like refiners, fuel importers and wholesalers – to provide gasoline and diesel fuel that complies with CI targets. CI targets become stricter each year.

But Can You Put a Price on the CI Deficit?

Staring down the new targets, obligated parties had no pricing mechanism to determine the daily cost of the incremental crude CI deficit – and no way show the cost the penalty would add to the price of each gallon of gasoline and diesel sold in California based on the assessed price of LCFS compliance credits.

After conversations with a number of obligated parties, OPIS began assessing just that in its Carbon Market Report.

Looking at the July 1 Carbon Market Report below, you’ll see that OPIS assessed the LCFS credit price at an average of $201.5000/MT. That meant the incremental crude CI deficit raised the cost of gasoline by 0.5540ct/gal and the diesel by 0.4990ct/gal.

 

OPIS Carbon Market Report

OPIS assessments also break out the cost of the crude deficit for a 90% gasoline or 95% diesel blend and assesses calculated numbers combining the compliance cost of the larger LCFS program and the incremental crude CI deficit for 90% gasoline and 95% diesel blends.

So, What’s the Cost Ceiling for the CI Deficit?

Should LCFS prices hit the 2020 maximum of $217.97/credit, then the combined compliance cost per gallon of gasoline (including the gasoline crude CI deficit of around 0.6ct) would be about 23.63cts/gal. For diesel, it would be about 22.74cts/gal.

These maximum figures could rise in coming years as CI targets become more stringent and the maximum credit price continues to increase with inflation.

And we already know the ceiling for the cost of the crude CI deficits will rise in 2021.

CARB in May said the 2019 crude average CI increased to 12.52 gCO2e/MJ, pushing the three-year rolling average CI to 12.26 gCO2e/MJ, which exceeded the baseline average CI of 11.85 gCO2e/MJ by 0.41 gCO2e/MJ.

Long story short, crude CI deficits will rise by about 78% in 2021, meaning a slightly higher LCFS fee from the refiner to the consumer.

California Crude Didn’t Exactly Clean up Its Carbon Intensity in 2019

Nearly 30% of California's crude was produced in-state last year. Oil fields in Kern County account for the vast majority of the state's oil production, and the average crude CI intensity for that material was well above the baseline – doubling or even tripling in some cases – CARB data show.

Oil imported into the state had lower CI scores. Saudi Arabia last year exported to California about 88 million bbl with an average crude CI of about 9.2 gCO2e/MJ, well below the 11.85 baseline. About 12% of the state’s crude came from Alaska, which carried an average crude CI of 15.9 gCO2e/MJ.

 

Major Sources of Crude Supplied to California

Source: CARB 

 

LCFS and CI: How It All Works

Since its 2011 implementation and 2015 re-adoption, the LCFS has served as a blueprint for regional and national governments seeking to establish programs designed to curb the impact of transportation fuels on greenhouse gas emissions.

The LCFS ultimately seeks to achieve a 20% reduction in the CI of California’s transportation fuels by 2030, with increasingly stringent target reductions from the 2010 baseline each year. In 2020, obligated stakeholders must achieve a 7.5% reduction, up from a 6.25% reduction in 2019, and will be followed by targets of 8.75% in 2021 and 10% in 2022.

 

Declining Carbon Intensity Curve

Source: CARB

 

For fuel produced or imported, a CI score is calculated using a model developed for California that considers the entire life cycle of processes involved in making, shipping and storing that fuel.

For fuels under the CI target for that year, the owner of that fuel accrues credits in the LCFS. For fuels over the CI target, the owner has an obligation that can be met by buying credits.

The cost of California’s LCFS credits climbed to record highs in early 2020, but have since retreated after CARB implemented a price cap, done in part to prevent credits from spiraling out of control.

As the program’s CI reduction targets have escalated in recent years, the generation of deficits has often outpaced credit generation, drawing from the substantial bank of credits from the earlier, less stringent. years of the program.

With the number of banked credits falling, prices in 2019 and early 2020 exceeded the previous 2019 effective price cap of $213.07/credit. The 2020 credit price maximum was set by CARB at $217.97/credit and that went into effect on July 1, 2020. The annual maximum credit price is set by CARB at $200 in 2016 dollars, adjusted for inflation.

So, How Does This Translate into Fuel Prices?

Let’s look at the July 1 report again:

 

OPIS Carbon Market Report

 

In the July 1 Carbon Market Report, you’ll find the LCFS Carbon Credit assessment at the top. This assessment range of $201.000-$202.000/credit, with a $201.5000/credit full-day average, was based on the reporting of market activity from a range of industry sources.

From there, OPIS provides the expected CI points for ethanol and biodiesel. On this particular day, each CI point of ethanol could be expected to be worth 1.6425cts, meaning, an ethanol plant with a CI score of 60 could expect to see a premium of about 16.4cts for its fuel over an ethanol plant with a CI score of 70. The biodiesel CI point was calculated at 2.5415cts.

Beneath those CI calculations, OPIS offers a range of various calculations for the carbon credit values of gasoline and diesel.

Learn more in our Renewable Fuels methodology under “OPIS’s California LCFS Carbon Intensity Calculations.”

Some refiners and suppliers treat these costs differently than others, but many rely on OPIS calculations in the Carbon Market Report to help make pricing decisions. 

Learn about the OPIS Carbon Market Report

Tags: Renewables, Gas & Diesel

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