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Future of Renewable Diesel Demand Looks Bright

Copyright © 2021 Energy Intelligence Group

Demand for renewable diesel in the US appears likely to surge through the middle of the decade, regardless of federal fossil fuel policies. Analysts with investment bank Morgan Stanley predict that consumption of the fuel will jump 140% from 65,000 barrels per day currently to 157,000 b/d by the end of 2025 in North America, with the US accounting for roughly two-thirds of the growth. Refiners see massive opportunities in the sector, with several recently announcing conversions or feasibility studies (OD Aug.7'20). Growing Up So Fast Renewable diesel, which is made from non-petroleum natural resources such as fats, greases and vegetable oils, will still constitute a marginal portion of overall diesel demand, according to Morgan Stanley, but it is one of very few fuels whose outlook in North America is even remotely rosy, let alone that bullish. The projected dramatic rise in renewable diesel demand is at odds with the overall domestic oil demand outlook and highlights the effects of emerging carbon regulations in various states rather than being market-driven, according to sources as varied as investment banks, consultants, sustainability advocates and refiners themselves. “This is down to regulations -- renewable diesel doesn’t [make money]” otherwise, according to John Auers of downstream consultants Turner, Mason and Co. But regardless of drivers, with demand set to increase, the returns on investment for refiners are attractive, and more downstream players are likely to look at conversions or newbuilds of renewable diesel infrastructure. Straight Outta Carbon California accounts for the bulk of incremental demand through 2025, experts say. The state currently consumes roughly 261,000 b/d of diesel, according to independent refiner Holly Frontier -- some 7% of US diesel demand -- and is home to an aggressive low-carbon fuel standard (LCFS). California’s LCFS looks to cut carbon intensity for transportation fuels by 20% by the end of next decade versus 2010 levels. Renewable diesel is a key element in making that happen (OD Aug.21'20). That’s because unlike biodiesel, renewable diesel does not need to be blended with petroleum before going into a truck engine’s tank -- it can replace petroleum diesel outright, gallon for gallon and barrel for barrel, Auers said. “Compared to [ultra-low-sulfur diesel], renewable diesel reduces total hydrocarbons by more than 10%, particulate matter by nearly 40%, carbon monoxide by 25% and nitrogen oxides by 15%,” according to the Renewable Energy Group, which supplies biofuels around the US. That means overall demand could remain stable but targets could still be met with greater use of renewable diesel. Given California's outsized economic clout relative to other states in the Padd 5 region, experts say the spread of similar standards to other states and higher production of renewable diesel to feed California is expected throughout the West Coast. Indeed, Washington state’s LCFS proposal is being revised for a renewed legislative push next year. Demand for renewable diesel could also jump on the US East Coast. Currently, New York’s state government is contemplating its own LCFS with goals identical to California’s -- the proposal is currently in committee. Demand for distillate fuel oils such as diesel and heating oil alongside kerosene in New York was some 131,000 b/d in 2019, according to the Energy Information Administration, making it the third-largest diesel consumer in Padd 1. That means New York, like California, could exert considerable influence on the regional downstream. And at least one major East Coast refiner, PBF Energy, is considering renewable diesel projects. “There [are] some other opportunities that we were looking at prior to the pandemic in Delaware City,” said PBF CEO Tom Nimbley in a recent quarterly earnings call. Meanwhile, several states in the Midcontinent and the Rockies are weighing their own carbon standards, with market players saying Colorado is especially likely to enact legislation. Export Opportunities Canada’s own LCFS will fuel another 35% of renewable diesel demand through 2025, according to Morgan Stanley’s outlook. And refiners say they see opportunities in other markets. “There's increasing demand in Europe. ... And on the supply side in Europe, we don't see the expansion announcements that we're seeing in the US,” Holly Frontier’s president for refining and marketing, Tom Creery, told investors during a second-quarter earnings call. Despite export possibilities, the US is likely to remain a net importer of renewable diesel, Morgan Stanley analysts said. That means the list of refiners looking to expand into the market is incomplete, a notion downstream players themselves have acknowledged. Frans Koster, New York

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