The U.S. refining sector, faced with decreased demand for its product, is starting to shrink via the closure of several refineries — actions that had been infrequent in recent years.
The good news for consumers of diesel fuel, however, is that some of the lost capacity will be replaced by continued investments in the production of renewable diesel, a one-for-one substitute for conventional diesel that has the backing of a variety of tax incentives.
The question facing the trucking and transport industries that consume diesel is whether the push for renewable diesel will offset the loss of conventional diesel resulting from refineries being shut.
Three significant refinery closures have been announced in recent weeks: the 161,000-barrel-per-day refinery operated by Marathon Oil Corporation MRO in Martinez, California, which sits in the Bay Area; the 27,000-barrel-per-day Marathon refinery in Gallup, New Mexico; and the 140,000-barrel-per-day San Francisco refinery complex of Phillips 66 PSX, which consists of two refineries connected by a 200-mile pipeline.
Compared to refinery closures in the past 15 to 20 years, that's a lot of shut capacity in one year. The U.S. also lost a big refinery last year when an explosion ripped through the Philadelphia Energy Solutions plant, the biggest on the East Coast. That refinery already was financially troubled; the explosion just administered the final blow, and the 335,000-barrel-per-day operation closed for good.
"Closing a refinery" is always a less-than-perfect term. At a certain point, the value of the refinery will slide toward the value of its scrap metal and other secondary items. It then can become worthwhile for somebody to buy it cheap and restart it. That's why saying any refinery is "permanently" closed probably needs an asterisk.
But when a company like Marathon says it is planning to "indefinitely idle" the refineries, as it has done in the case of Martinez and Gallup, that generally means there is no plan to restart operations for a time period that would stretch well beyond any definition of "foreseeable future."
A list of refinery closures maintained by the Energy Information Administration shows few shutdowns in the past several years — and none of any significant size. Some of the refineries that were technically closed in 2017 through 2019 actually hadn't operated in several years.
Two plants headed for renewable diesel
What's different this time is that two of the refineries slated for closure, Marathon-Martinez and the Rodeo refinery that is part of the San Francisco complex at Phillips, are slated to be converted into renewable diesel plants. That raises the prospect that for diesel consumers, at least, the supply of that fuel may not be impacted as much as the full closure of a plant might otherwise suggest.
Renewable diesel and biodiesel are not the same thing. Both are made from a variety of similar feedstocks, such as greases, fats and agricultural oils.
But biodiesel is a blendstock that is blended into diesel or heating oil, which like diesel is a distillate product. For quality reasons, it cannot be blended into jet fuel, which also is a distillate. The amount of biodiesel that can be blended into those fuels can be as high as 20% or as little as the low single digits. (Ethanol, which is to gasoline what biodiesel is to diesel, is usually blended at 10%, can be controversially blended to 15% for all cars with enormous arguments about whether that's a smart thing for engines, but can also be 85% of E-85, which can only be used in what are known as flex fuel vehicles.)
Renewable diesel is known as a "drop-in fuel," which means it can be dropped into existing diesel uses with no other changes necessary.
Unlike biodiesel, renewable diesel is produced at refining facilities using processes such as hydrotreating and gasification that are used to produce conventional diesel. Biodiesel can be produced in smaller stand-alone facilities using a less complex process called transesterification.
When Phillips announced it was transforming Rodeo into a biodiesel plant, it said it would produce 680 million gallons of renewable diesel per year. That works out to about 44,000 barrels per day. Phillips lists total distillate capacity at the plant now as 65,000 barrels per day but that would include other distillate products like jet fuel.
There already was a renewable diesel project underway at Rodeo. When that is completed, combined with the conversion, the output would be 800 million gallons per year, which translates to about 50,000 barrels per day of renewable diesel, according to a Phillips spokesman.
No firms news from Marathon
As for Marathon, its plans for Martinez have been less specific. On the company's second-quarter earnings conference call last month, CEO Mike Hennigan said Marathon is "evaluating repurposing the refinery toward the production of renewable diesel." He said Martinez would have the capability to produce "up to" 48,000 barrels per day of renewable diesel.
It isn't coincidence that both Martinez and Rodeo are looking at renewable diesel facilities in California. The state operates under the California Low Carbon Fuel Standard (LCFS), a regulatory and incentive program designed originally to reduce the carbon intensity of transportation fuels like diesel and gasoline.
The LCFS is complicated. It is a regulatory program but one without a hard top-down structure.
At its heart is an incentive program to produce lower-carbon fuels through a variety of what are known as "pathways." For example, if you can show that as a supplier of gasoline you blended ethanol produced at an ethanol plant using solar power, you get more credits than if you blended ethanol from a plant that was powered by coal. If you operate a natural gas fleet of vehicles and the natural gas can be shown to have come from methane coming off a landfill — it can be done but can also be complicated — the credits generated by that are high.
But once you have them, they can be sold. In 2015, LCFS credits were less than $30/metric ton for a ton of carbon. Today, they're about $200.
Renewable diesel also generates a blenders tax credit, a federal tax break of $1 per gallon of biodiesel.
All of the incentives have added up to enough investment in renewable diesel that a web commentary recently by Strata Advisors was headlined "Overcapacity Looms as More and More US Refiners Enter Renewable Diesel Market."
That may ultimately be bad news for the companies investing in the process. But if it's true, it's good news for consumers of diesel, since renewable diesel and conventional diesel are interchangeable.
One thing that hasn't changed is that the commitment Phillips 66 is making to renewable diesel is not altering its plans to abandon a project in the state of Washington. That project was scrapped because of an inability of the company and local officials to agree on several issues. The Phillips spokesman said that renewable diesel plant still is not moving forward.
More articles by John Kingston
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© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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