August 14, 2020

Phillips 66’ move into biofuels likely to saturate future California demand for renewable diesel

Stratas Advisors

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After several months of COVID-induced refinery shutdowns in California, Marathon and Phillips 66 both announced the closure of their refineries in the Golden State this week. Although Marathon mentioned that it would consider the production of renewable diesel/HVO at its Martinez refinery, Phillips 66 immediately announced that they already started converting their Rodeo, CA refinery into the world’s biggest renewable diesel production facility. The announcements follow similar decisions by HollyFrontier and CVR Energy to also turn to producing renewable diesel.

As mentioned in our earlier analysis on LCFS, refiners are drawn to the California renewable diesel market through the presence of three stackable subsidies – two of which are federal. In the case of CVR Energy, CEO Dave Lamp mentioned that the Blenders Tax Credit (BTC) had been decisive in driving the company’s move to convert its Oklahoma refinery. This federal subsidy, which was recently reintroduced through 2022, represents a value of $1/gallon. In the case of CVR, if their 100 million gallons per year facility runs at full capacity, the conversion costs of $100 million dollar can be recouped through this subsidy alone in just one year. Savings on RIN expenses, along with gains from LCFS credits, complete the profitable picture that has drawn so many refiners to the (California) renewable diesel market. Refiners, therefore, have a strong incentive to get their facilities up and running before the BTC expires in 2023.

The recent moves by refiners also highlight a new trend of refiners actively investing in biofuels production assets. Although some players have already been operating biofuels assets in the past, companies like Marathon, CVR, Phillips 66 and HollyFrontier have largely relied on third companies for their supply of biofuels and/or RIN/LCFS credits. Their entry into biofuels production means that established biofuels producers will not be able to take full advantage of the growth in biofuels demand on the West Coast. Prices for feedstocks such as soybean oil, however, will see strong support in the medium term – as vast volumes will be necessary to feed all the HVO capacity that is currently under construction.


Source: Stratas Advisors

With Phillips 66 having given the green light on its HVO project, other refiners will see the prospects of their proposed HVO production projects dwindle. Based on the most recent announcements by refiners, there will be enough HVO production capacity to replace the equivalent of all 2019 California demand for ULSD. Below graph does not include co-processing capacity, neither does it include demand for FAME/biodiesel, which is still cost-competitive against HVO and is expected to be blended in so far the blending limit allows this. On top of this, part of diesel demand in California is projected to be displaced over time by alternative fuels such as CNG, LNG, hydrogen and electricity. Expressed hopes by some US refiners to export HVO volumes to Europe also seem slightly optimistic – given the recent HVO capacity additions made by ENI and Total.

Company

Location

Capacity in mmgy

CapEx in mln USD

CapEx per mmgy capacity

Online

Neste

Singapore

340

850

2.5

Yes

REG

Geismar, LA

75

175

2.333333

Yes

Diamond Green Diesel (Valero)

Norco, LA

275

Unknown

-

Yes

Ryze Renewables (2 facilities)

Reno, NV

168

250

1.488095

H2 2020

Marathon

Dickinson, ND

183

470

2.568306

Q4 2020

CVR Energy

Wynnewood, OK

107

100

0.934579

Q3 2021

Diamond Green Diesel Expansion

Norco, LA

400

1100

2.75

H2 2021

HollyFrontier

Cheyenne, WY

90

340

3.777778

Q1 2022

BKRF

Bakersfield, CA

153

365

2.385621

Q1 2022

HollyFrontier

Artesia, NM

110

360

3.272727

H1 2022

Neste Expansion

Singapore

440

1600

3.636364

Q1 2023

Phillips 66

Rodeo, CA

800

750

0.9375

Q1 2024*

Diamond Green Diesel (Valero)

Port Arthur, TX

400

Unknown

-

FID Pending

Omega Green Diesel

Paraguay

250

800

3.2

FID Pending

*120 mmgy of capacity will come online in Q2 2021
Source: Stratas Advisors

Phillips 66 has announced that it will use “cooking oil, fats, greases and soybean oil” as feedstocks. Similar announcements have been made by other refiners, likely leading to a further crunching of an already tight market for waste feedstocks. The mentioned HVO projects’ competitiveness relies only partly on their ability to add production capacity, with the ability to source waste feedstock being at least equally important. In this respect, Neste and Valero seem well-positioned, as they have supply chains in place to source their HVO facilities with sufficient waste material.

The current capacity additions have been based, to an extent, on the existing regulatory framework in California (and Oregon) – their LCFS programs being planned out through 2030 and 2035 respectively. Any expansion announcements beyond this point, however, will need to be based on somewhat more uncertain outlooks. There has been talk of replicating California’s LCFS in Canada, Washington, Colorado, New York, or even at a federal level in the US. Likewise, the BTC, which has driven the FIDs for a good chunk of the projects in the table above, can still be renewed after 2022. There is a chance that future policy decisions will indeed lead to the renewable diesel demand that some of these refiners are anticipating, but the risk of future stranded assets is also very real. In the short term, this will likely lead to companies as Marathon and Valero to stay on the fence with regards to their FIDs on additional HVO capacity in Port Arthur, TX and Martinez, CA respectively. 

Subscribers can access the full report from our Global Biofuels Assessment service. 
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