US oil refiners hope fat is way out of lean times - Financial Times

California’s goals for cleaner motor fuels are sparking changes at big US oil refiners, as they retool to make a form of diesel from cooking oil cast off by restaurants and animal fats rendered at slaughterhouses. 

Marathon Petroleum, Phillips 66 and HollyFrontier are among the refining companies exploring or pursuing projects to produce “renewable diesel”, which can substitute petroleum-based diesel in trucks and buses and can be made with some of the same equipment.

The moves come as the pandemic knocks US oil demand to the lowest levels since the late 20th century, forcing refiners to curtail volumes. Yet in renewable diesel they have an opportunity to expand. 

The incentive is in progressively tougher emissions policies in California. The state’s low-carbon fuel standard was designed to hasten a shift to transport with lower greenhouse gas emissions, the main force driving climate change. Scientists warned climate change would intensify wildfires, a threat borne out as millions of California acres burn this month.

The low-carbon programme awards credits to suppliers of fuels whose emissions are lower than a state-set benchmark. Suppliers of carbon-heavy fuels such as petroleum-based diesel must purchase these credits to comply with state law.

As the benchmark tightens, the price of credits has soared to almost $200 a tonne of carbon dioxide, prompting more oil refiners to expand into fuels that receive carbon credits. Renewable diesel and a related fuel, biodiesel, typically earn more credits per gallon than other biofuels. Last year California used a combined 830m gallons of both types of diesel, accounting for 22 per cent of the total state diesel market, according to the National Biodiesel Board.

Phillips 66’s oil refinery in Rodeo, California, would be turned into the “world’s largest renewable fuels plant”, replacing its intake of crude oil with used cooking oil, fats, greases and soyabean oil, the company said. The plant will be able to supply 800m gallons a year of biofuels, mainly renewable diesel. 

“We were seeing declining margins and a pretty poor business environment for this asset over time,” said Nik Weinberg-Lynn, renewable energy projects manager at the Phillips 66 refinery. “Making this move allowed us to operate in this community for a long period of time.” 

Mr Weinberg-Lynn said that converting the Rodeo refinery to biofuels would also help Phillips 66 offset the financial burden of carbon credits at the company’s oil refinery in Los Angeles, which would continue to operate as usual. 

California’s fuel policy is having an impact outside the state. Marathon, the largest US oil refiner, is converting an oil refinery in Dickinson, North Dakota, to make 184m gallons a year of renewable diesel from corn and soyabean oil for sale to California. Last month it said it would close its oil refinery in Martinez, California, and explore repurposing it to make renewable diesel.

HollyFrontier called California the “key driver of demand” as it aims to produce more than 200m gallons a year of renewable diesel. The company last month shut down its oil refinery in Cheyenne, Wyoming, with plans to convert it to renewable diesel production, and it is adding a renewable diesel facility next to its oil refinery in Artesia, New Mexico. 

Other refiners involved in renewable diesel include Valero Energy, whose Diamond Green Diesel joint venture with the fats recycler Darling Ingredients is more than doubling the size of a plant in Louisiana to 675m gallons a year and is exploring construction of a new plant in Port Arthur, Texas. 

US refiners are not abandoning petroleum. Their trade association supported the Trump administration’s recent rollback of vehicle fuel economy standards that the Environmental Protection Agency estimated would increase annual petrol consumption by 15bn gallons in 2050, compared with the earlier regulation.

The refiners’ trade association sued to block California’s low-carbon fuel standard in 2010. Unsuccessful in court, refiners are now navigating the policy shift in the second-largest state market for liquid fuels.

The wholesale conventional diesel price is about $1.15 a gallon in California. Sellers of renewable diesel can receive additional revenue of about $3.50 a gallon from the value of the California low-carbon fuel credits, a separate credit under the national renewable fuel programme and a $1 a gallon federal blender’s tax credit, said Gary Greenstein, a refining consultant at S&P Global Platts. The credits compensate for the high production cost of renewable diesel. 

“Refiners are looking at an environment where sales are down this year, and the outlook is not particularly rosy over the next three or four years. On the other hand, this renewable diesel is currently gaining about $3.50 a gallon of credits,” Mr Greenstein said. 

Renewable diesel and biodiesel are both made from vegetable oils and animal fats. The social lockdowns of the coronavirus pandemic put pressure on that supply chain, said Harry Simpson, chief executive of Crimson Renewable Energy, a biodiesel refiner. 

Supplies of used cooking oil collapsed as restaurants and cafeterias closed, he said. Closures of meatpacking plants in response to contagion among workers slowed the shipments of tallow from livestock, Mr Simpson added.

Crimson is expanding by half the capacity of its Bakersfield, California, biodiesel refinery to 36m gallons a year, adding equipment designed to handle lower-quality feedstocks, such as the gunk collected from restaurant grease traps, Mr Simpson said. 

“The demand for carbon credits is growing, and that’s something you can forecast and count on,” he said.

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