September 03, 2020

A League of Their Own - The Refining Sector Is Changing at the Speed of Light in PADD V

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Refiners and traders in the USWC have always faced very different challenges than those from the rest of the country. From crude supply perspective, USGC refiners have the most advantageous conditions in the world, with plenty of domestic options, ranging from medium-sour conventional streams to extra light barrels produced from tight-oil developments. USWC crude traders have not been able to share the boon of tight oil, so their crude options have been limited to domestic heavy crude, Alaskan crude and Latin American supplies, primarily from Ecuador, Mexico or Argentina.

From a demand perspective, sluggish consumption stemming from the pandemic has forced PADD V refiners to reduce utilization rates to levels hovering 63% for several months, and the entire region is poised to enter a new era for local refineries.

  • Prior to the pandemic US West Coast’s refining capacity was 2.875 million b/d, so the closure of the Marathon and P66 refineries represent a 10% capacity reduction for PADD V.
  • The closures will result in approximately 130 thousand b/d of lost supply of gasoline and 110 thousand b/d of diesel (estimate considering 80% utilization rate)
  • This amount of lost supply is roughly the same as PADD V exports associated with these products. In other words, the clean products balance is poised to become tighter for this region (with limited options for product imports into PADD 5 because of logistical constraints), and more prone to price spikes should an unplanned incident take place.

Beyond the refining announcements, environmentally-friendly subsidies in California have spawned a wave of investments that are encouraging investments in renewable diesel. The decision of Phillips 66 to convert its current refinery to the largest renewable diesel plant in the world, with around 800 million gal/year (~ 52 thousand b/d) is a prime example.

When considering all of the announced investments that could come to fruition, it is possible that the associated volume of renewable diesel could potentially displace the bulk of refined-diesel, and take most of the state’s consumption. If this were to happen, ULSD exports would be the only option for some refiners other than shutting down – but such an occurrence would generate an imbalance with the rest of the products.

Declining refining capacity and increasing participation of renewable diesel in California is truly a different dynamic than for any of the other states – of which none have the same subsidies underpinning investments in renewable diesel. Unlike E10 gasoline, renewable diesel is actually a fungible product, so transportation and distribution are more transparent than the case of ethanol/gasoline, which allows refiners to actually be part of this business without requiring a shift in their focus or large investments in their supply chain.

There is a myriad of additional information pertaining to renewable diesel and upcoming developments that refiners need to be aware about – along with other analyses and forecasts pertaining to biofuels and alternative fuels – and can be accessed through our Global Biofuels Outlook and ourGlobal Biofuels Assessmentservices.

The insights gained from those services need to be integrated with developments in the refining sectors (through our Global Refining & Products and North American Refining & Products) to assess the outlook for gasoline and diesel markets – and the opportunities and risks for refiners and for suppliers/developers of biofuels and renewable fuels.


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