Red-Hot Renewable Diesel Encouraging Producers To Buy Into Upstream Supply Chains

It was the sort of deal that is a shocker because it goes completely against the trend in the oil business.

The transaction in question was the recent announcement by Phillips 66 PSX that it was going to "reverse integrate" its renewable diesel operations. In doing so, the company sent two messages.

One, which it had already signaled but reaffirmed with the move, is that renewable diesel is extremely important to the U.S. refining sector. 

The second is that to make renewable diesel, you need feedstocks. And companies with big renewable diesel plans need to worry about that. 

What Phillips 66 did was become a minority owner of Shell Rock Soy Processing, based in Iowa. Shell Rock is building a facility in northeast Iowa where it will turn soybeans into soybean oil. That oil is then used as a feedstock to make renewable diesel. 

In the statement announcing the investment, Brian Mandell, Phillips 66's executive vice president of marketing and commercial, said the investment in Shell Rock "expands our reach into the renewable diesel value chain and provides secure feedstock."

The investment can be seen as reverse integration because it takes a downstream processor of mostly petroleum feedstocks — Phillips 66 — and goes upstream into owning the production of at least one of those feedstocks, soy oil.

That's notable because Phillips 66 has existed in its current form only since 2012. That year, ConocoPhillips spun off its refining assets into a separate company, turning what had been a giant integrated company into two separate units. One of them kept the ConocoPhillips name and just produces oil and natural gas, without any processing of them. The second, Phillips 66, refines oil into petroleum products, supplied with crude and other feedstocks from a variety of sources, including ConocoPhillips.

What was also notable about the Phillips 66 soybean deal is it took place at about the same time that another supplier of diesel fuel was finishing up a similar transaction.

That one did not involve a refiner. Instead, it saw Love's truck stop chain, and its trading arm Musket, enter into a deal with Cargill to build a new production plant in Nebraska. But instead of soybeans, animal fat, or tallow, will be the feedstock. Musket will market renewable diesel throughout the U.S.

"It does make a lot of sense," John Auers of refinery consulting firm Turner Mason said of the Phillips 66 deal. Auers, executive vice president at Turner Mason, said the primary problem that the growth of renewable diesel faces is "the feedstock wall."

The wall is the current limitation on feedstock supplies, whether it's animal fats, soybean or something else, though those two products are considered the best feedstocks. Lining up the supply of those feedstocks, Auers said, "is what is going to make a difference between those who survive and those who don't."

Renewable diesel is not the same as biodiesel, in which a diesel-like product produced from some of the same feedstocks as in renewable diesel is blended into petroleum diesel. The process to make that sort of biodiesel is far less complex than what is needed to make renewable diesel. It mostly involves crushing soybeans or other feedstocks at a biodiesel processing facility, doing a somewhat limited level of further treatment and then blending the resulting product into diesel or heating oil. 

Renewable diesel is different. It is a process that goes on at a petroleum refinery. What comes out of the renewable diesel plant is a product whose quality is identical to that of petroleum diesel. If a trucker wants to fill a truck with 100% renewable diesel, there is no mechanical limitation. That isn't the case with biodiesel.

Phillips 66's renewable diesel strategy has at its core the Rodeo Renewed project in the San Francisco Bay Area, where the petroleum refinery is being closed but a renewable diesel facility is being constructed.

Some perspective is needed on the size of the switch at Rodeo. The 120,000-barrel-per-day refinery that is being closed there will be replaced by facilities that will make 8,000 barrels a day of renewable diesel. 

Nik Weinberg-Lynn, the manager of Rodeo Renewed, as the project is known, said its launch is still in the permitting phase. It is valued at $800 million, he said in an email to FreightWaves.

Why did Phillips 66 take the fairly drastic step of shutting down a full refinery and then turn around and start conversion of some of the plant to make renewable diesel, at a volume that is ultimately just a fraction of what came out of the refinery previously? In part because of where it is: California. 

California has what it calls a Low Carbon Fuel Standard, a complicated system that has an ultimately simple aim: to reduce the carbon footprint of transportation fuels like gasoline and diesel. If a supplier to the market does that, it earns credits in response. Those credits can then be sold on the open market to other companies that need to cut their carbon footprint. 

In 2013, the price of an LCFS credit was in the single digits. More recently, it has been closer to the legal cap on prices, which began a few years ago at $200 and is adjusted upward annually. Renewable diesel's carbon footprint is far smaller than that of petroleum, so the manufacture and sale of it generates credits to the manufacturer of the fuel. 

In a statement to FreightWaves, Phillips 66 made clear that California's regulatory regime was a reason for building its Rodeo Renewed project in the state. "The introduction of renewable diesel into a market starts with policy," the company wrote. "Policies mandating carbon reduction make it economically feasible to invest, produce and sell renewable diesel. The LCFS program makes California the most attractive state for renewable diesel market penetration."

Soybean oil isn't even the best feedstock to make renewable diesel if generating credits is a primary goal. A look at California's list of "pathways" to make renewable diesel and their carbon intensities shows that renewable diesel from tallow, which is in the Love's-Cargill deal, generated more credits per gallon. 

But it isn't easy to just generate tallow, whereas soybean production is easier to incentive through higher prices that might be created in part by demand for the product for making renewable diesel or biodiesel.    

"The incremental production of renewable diesel is going to come from soybeans," Auers said.

Weinberg-Lynn agreed that just based on carbon intensity, soybeans aren't the top blendstock. But the Rodeo project isn't stuck on one type of feedstock. "One advantage of this project is that it will allow for the flexibility to produce renewable fuels from a variety of feedstocks," he said. 

On Phillips 66's quarterly earnings call, Mandell said the input for the first 8,000 barrels of output will be soybean oil. But while that would cover the planned output, there could be room for more. "For the rest of the plant, we will need any form of feedstock," he said. "So the plant is predicated on mostly low (carbon intensity) feedstock; we'll be buying used cooking oil, fats, but we'll also be buying some vegetable oils, some higher, some lower feedstock. And our model will kind of dictate to us which feedstock to buy." 

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