Did you know that Portland, Oregon has begun phasing out petroleum diesel?

May 29, 2024 By ,

May 29, 2024

By: Mark Fitz, President of Star Oilco

The first fossil fuel phase-out by a U.S. city is off and running. On May 15, 2024, Portland kicked off phase one of its rebooted Renewable Fuel Standard. Called an “RFS” for short, it was originally implemented in 2006 as the first B5 (5% biodiesel, or BD, blended with petroleum diesel) mandate in the U.S. Before 2006, only tax incentives for fuel sellers had been used to encourage BD blends.

Portland aims to lead the U.S. again by aggressively modernizing their ordinance to mandate an initial 15% renewable diesel (RD) or BD blend percentage, increasing to a 50% blend mandate by July of 2026, and a 99% blend requirement in 2030. Fines for non-compliance can be as high as $15,000 a day, but the City of Portland has designed measures to call off the mandates if there are problems. Given public statements by Portland’s staff, however, willingness to back off the mandate is low.

What makes the Portland RFS unique as well as ambitious is it’s CO2 requirements.  Beyond a simple blend mandate, the Portland RFS also includes a carbon intensity (CI) reduction threshold. The aggregate average CI of the biofuels used to comply with the RFS must be less than or equal to 40 gCO2e/MJ as certified by the Oregon DEQ’s Clean Fuels Program (CFP). This would prevent nearly all of the available B99 from Oregon’s CFP pathways inside the state from satisfying the 15% blend requirements. Given the combination of the blend mandate and CI-reduction threshold, the 99% RFS blend mandate in 2030 would only allow R99 or B20/R80 blends for diesel vehicles inside the city and would disallow BD products made from virgin soy and canola, advantaging lower-carbon-intensity (CI) waste oil biofuels over monocrop agriculture or palm oil products.

How does Portland RFS compliance work?

As of May 15th, fuel distributors inside Portland city limits are required to prove they are only buying for delivery or handling fuel that meets RFS requirements. Their customers will not need to provide proof of compliance until July 1st when the rules and enforcement requirements available to the City will move to retail gas stations and bulk purchasers of the fuel directly. The City of Portland has stated it will sample fuel in the field and demand they prove fuel used inside the city is a 15% biomass-based diesel (BBD) blend as well as track back the fuel’s CO2 footprint to avoid being fined for non-compliance.

Fuel suppliers who must report to the City of Portland have several ways to prove compliance. (But first, an important note: End users at retail fueling stations are not obligated under the RFS, so, don’t expect a Portland “fuel cop” showing up and checking fuel in your neighborhood pick-up truck diesel tank.) Regulators are expected to sample fuel suppliers bulk fuel tanks. If a trucking company buys fuel by mobile onsite fueling service topping off their vehicles they must also prove compliance by producing a contract with a fuel supplier who will accept the obligation or provide proof of the BBD blend of the fuel. Commercial buyers of fuel will need to prove they meet the standard as will the vendor above them.

 

What must a fuel buyer show the Portland fuel regulators? 

For a fuel buyer with a dedicated vendor, they will have to be able to prove all fuel received to their site meets RFS requirements. This can be done with a bill of lading (BOL) that tracks a fuel’s source all the way back to import into Oregon. This is easy for a branded gas station with a supply agreement and one vendor. The neighborhood Chevron station would point to Chevron to provide the necessary evidence, but the local retailer will have to prove that they received only fuel above a 15% blend BBD (BD and/or RD). For branded gas stations, not much changes other than the blend of the fuel and accounting upstream at their branded supplier.

This may not be easy for a wholesale buyer. Wholesale fuel distributors buy from possibly dozens of vendors sometimes reloading mid-route and having multiple BOLs of fuel on one truck. The industry can easily provide the BOL associated with the fuel delivered, but this practice is new and not done anywhere else.

It also gets more complicated than just showing a delivery ticket that tracks to a BOL as well. The proof of the biofuel blended with the fuel is up for investigation. This is not an existing industry practice.

If a fleet or fuel distributor cannot show a BOL that tracks back to a sufficiently low-CI fuel for every delivery, they will be required to follow a mass-balancing approach called book-and-claim. Via book-and-claim accounting, a fuel supplier can (and must) show that, on a quarterly basis, the weighted average CI of the fuels sold complies with the RFS, even if every delivery did not. This approach should work very well with RD adopters given that nearly all the R99 sold in Oregon is below the 41 CI requirement.

BD users, usually the more competitive lower cost diesel buyers, will have a tougher time sourcing product unless new lower CI pathways and vendors start developing into Oregon. As Portland often runs out of R99, this availability is backstopped by B20.

What this will likely mean is fuel distributors will go out of their way to sell R99 and add up the volumes a seller would need for the quarter to exceed 15% of all diesel sold.

What are the terminals (importers of record) doing?

It’s important to note that before the implementation of the RFS, Portland already had its own unique fuel tax which has enabled a terminal-level “ship to” address system for organizing whether a product is destined for Portland. Oregon also has a state-wide, on-road tax-exempt diesel tax regime for diesel trucks over 26,000 gross vehicle weight (GVW). Trucks plated over 26,000 lbs do not pay a road tax per gallon but instead a weight/mile quarterly filing. This might be complicated for some fleets that file these taxes on their own. The City of Portland has its own per-gallon diesel road tax of $0.10 for vehicles under 26,000 GVW as well as a City of Portland weight/mile tax collected by the Oregon Fuel Tax Group on its behalf when vehicles are over 26,000 GVW. At a terminal level though, a Portland-destined diesel delivery has a tax obligation that pre-dates the Portland RFS enabling a system for what product must conform to the Portland RFS.

From what we can see at this point, BP is offering a Portland RFS B20 product with a quarterly statement that they have mass balanced the product to meet Portland’s standard. Although they have previously offered an R99 product in the Portland market, they are not offering it currently. BP states that if R99 is offered, it will conform to Portland’s RFS. Shell has created a dedicated lane for Portland-compliant B15 fuel. The McCall Terminal is offering a City of Portland B15 product code that is currently $0.02 less than Oregon CFP ULSD and a full nickel more expensive than B20 that is non-Portland RFS compliant. Chevron has offered a Portland-conforming product with a mass balance quarterly statement. Phillips 66 is ahead on the Portland RFS given the contracts they have been sending out to update their customers. A formal letter or comment from Phillips 66 was not available at the time of writing, but we assume they will provide a mass balance quarterly statement like their competitors. The variety of brokers and position holders at Kinder Morgan, Nu Star, and Zenith do not appear to be making any moves with the Portland RFS at this time. This may indicate that those lifting from their positions will be responsible for their own quarterly reports with the City of Portland.

How did the first few days of the RFS go?

Leading up to the midnight start of the RFS, Portland immediately ran out of R99 available from the primary sellers of this product. BD that met the CI threshold requirement was not available. Portland suppliers with contractual supply relationships with Neste, Valero, Chevron, and Phillips 66 – the only fuel suppliers with product capable of meeting the RFS CI threshold – had supply while those without such contractual relationships had real trouble meeting requirements.

The choices made by suppliers are evidenced at retail branded gas stations in Portland.1 Most retail fuel pumps are showing two stickers for fuel content meeting the Federal Trade Commission and Oregon Weights and Measures standards – a green sticker indicating the fuel contains between 5%-20% biodiesel (B5-B20) and/or an orange sticker indicating the fuel contains 99% RD (R99). But this is not fully consistent across all stations.

On a tour of Portland retail stations, we note that Chevron has chosen a 55% RD / 20% BD / 15% petroleum diesel blend as their go-to market premium diesel biofuel.

Branded Shell diesel stations showed no marking on their pumps for even a B5-B20 blend. The Shell terminal in Portland, however, added a “B15” arm for diesel which would indicate their strategy to meet the program. We observed another Shell station in NW Portland with a clearly marked unbranded pump with R99 and B5-B20 stickers side-by-side.

Fred Meyer seems to have opted for B5-B20 diesel.

Space Age sites were all marked with the B5-B20 sticker as well as an R99 sticker.

CFN and Pacific Pride commercial cardlock locations prominently display B20 with many also advertising R99.

Several commercial cardlocks in Portland have a branded Neste R99 pump.

76 stations (Phillips 66) have moved to R99 renewable diesel with stations flying flags announcing it and signage added to lighted street price boards.

1 Many branded retail stations may have supply agreements with an unbranded diesel option under which they can source diesel on their own with no brand requirements. In this case, pumps are typically labeled as unbranded diesel fuel. What is shown herein is for branded diesel pumps which indicates a decision made by these larger brands in the Portland, Oregon market.

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