Hulk Smash! The Importance of the Valero v. Sundive Lawsuit on the RIN Market

January 13, 2021

Sometimes, thing don’t happen the way that they should, and it makes others very angry. Valero Energy Corporation (“Valero”) is just a tiny bit mad at Sundive Commodity Group (“Sundive”). So mad, in fact, that Valero is suing Sundive over Sundive’s inability to procure RINs for Valero, forcing Valero to pay over $10 million more for RINs to meet their compliance obligation. #hulksmash

So what actually happened in this case? Valero had about 100 contracts with Sundive for the purpose of securing RINs to meet Valero’s compliance obligation. Valero alleges, through the terms and conditions of these contracts, Sundive was supposed to secure roughly 106 million RINs. The lawsuit alleges, in September of 2020, Sundive failed to deliver 21.6 million RINs to Valero. The lawsuit also alleges that Sundive failed to deliver 8 million RINs in October and 4 million RINs in November. The lawsuit alleges that, due to Sundive’s multiple breaches of contract, Valero had to spend about $10.1 million more to secure the same number of RINs. In other words, if Sundive had done what they had promised, Valero would not have had to spend as much money for the same thing.

As a quick refresher, obligated parties and exporters are required to retire RINs to meet any compliance obligation that they incur over the course of a compliance year. This means, an importer of nonrenewable fuel, a refiner, and an exporter of renewable fuel, by virtue of the fact of their business activities create an obligation, will need RINs to satisfy that obligation. The obligation that these types of businesses incur can be satisfied multiple ways, but the most common way is for these businesses to purchase and retire RINs against their obligation. For more details, read Easy Peezy Lemon Squeezy: The Ins and Outs of the Renewable Volume Obligation, written by yours truly.

So why does this matter? This is two corporations entering into one of the most boring types of lawsuits (at least, in my opinion) and in the end, it all basically comes down to money, like almost everything else. Or does it? In many ways the RIN market mimics the stock market. One RIN could be considered the equivalent to a share of stock, both being an intangible value that are able to be traded among wiling participants. However, one unique thing about the RIN market is that it is based on a compliance need rather than an investment interest. This means, that holder of a RIN has two options, based on their position in the Renewable Fuel Standard (RFS). One option is to retire against their obligation if appropriate, the other is to trade to an obligated party. The trading angle is where this lawsuit gets a little interesting.

Around the time the lawsuit was filed, the prices of RINs started to increase. There are many factors that go into RINs increasing, but one such factor was this lawsuit. Valero, being a large player, had entered the market in a different way. This means, RFS participants could be more competitive with the price of their RINs. As I alluded to earlier, RINs are a compliance need rather than an investment interest. The significance of this being, due to the fact that RINs are an instrument of the regulation, procuring RINs for an obligated party is mandatory as opposed to a stock investment which is generally optional. When a large player enters the RIN market with this type of need, the rules of supply and demand begin to more keenly take effect.

Wait, wait just one minute. Doesn’t that mean that RIN owners without obligations, such as traders and blenders can hold obligated parties “hostage” on the market, giving a more competitive market advantage. Well no, actually, not really. If you notice, the facts are that Valero would have had to procure these RINs either way. Had the contracts been performed, Sundive would have sold Valero RINs at a certain price as decided upon between the parties. Many obligated parties have similar arrangements, creating more flexibility in day-to-day operations and allowing for more control over their expenses. The point of this lawsuit isn’t to demonstrate that Valero has additional options besides being “forced” to play the market. Strategic partnerships among obligated parties are common and often times happen as a mechanism of avoiding having to guess at the RIN market.

Will Valero be successful in their lawsuit? Maybe. They certainly seem to have a claim. Does this mean the RIN market will respond to the continuation of this suit? Maybe, but also maybe not. As I stated above, there are several factors and variables in the RIN market, this lawsuit just so happened to be the most prominent at the time. Will Valero be less angry? Welllll…how angry would you be if you were out over $10.1 million? If it were me, I’d have adopted the Hulk as my mascot by now. Time will tell if Valero is successful in their suit.