Refining: Renewable Diesel New Cash Cow for US Refiners

Copyright © 2021 Energy Intelligence Group

For independent refiner Valero in the US, renewable fuels are just 6% of the business, but they delivered 50% of the profit. Ethanol and especially renewable diesel contributed $348 million to the bottom line in the second quarter versus $349 million for the traditional refining business. Valero ran 2.8 million barrels per day of crude through its units in the second quarter, and it produced 100,000 b/d of renewables, one-quarter diesel and the balance ethanol. Renewable diesel delivered $248 million to the bottom line. This is the advantage of being an early mover, Valero said. No wonder the company is adding more capacity to its Diamond Green Diesel joint venture, which sources a wide range of feedstock from soybean oil to cooking oil, to which Valero adds its refining expertise. And Valero is not the only US refiner on the renewable path. The Energy Information Administration thinks the US might produce 325,000 b/d of renewable diesel by 2024, in addition to some 1 million b/d of ethanol. Companies continue to convert traditional refinery units that are no longer profitable. Renewables performed “exceptionally well,” Valero said with a dose of understatement. Renewables highlight that the core business of refining is still underperforming. Most refiners did return to profitability in the second quarter after a year or more of losses, but for many the margins remain meager. Refiners in the US are doing better than Europe and Asia, where companies still have little incentive to run more crude above the baseload (related). Oil demand is rising, but draining inventories keep product prices down, with the exception of gasoline (related). The Delta variant to Covid-19 is sweeping across Asia. Refiners in China are planning run cuts, perhaps up to 700,000 b/d (related). Global refinery runs in July dropped 200,000 b/d compared to June to 78.6 million b/d, as Chinese runs fell 900,000 b/d. By the end of the year, perhaps in November, runs might move beyond 80 million b/d to meet high winter demand in the Northern Hemisphere. Demand depends much on the combination of colder weather and virus infections. Renewables are not a new venture for US refiners -- they have been involved in ethanol for more than a decade. But what had been an addition to the traditional crude oil conversion business back then now feels more like a path to a new identity. Refiners, like the rest of the industry, feel the pressure to reinvent themselves and prepare for a business with less crude oil -- at least with less carbon emissions. They are not in the renewable diesel business for the volumes. Renewables cannot replace crude oil. It is the generated cash flow that makes it attractive, the cheap feedstock and the tax credits. Refiners meet federal and state renewable standards while making lots of money and can advertise how green they are -- even if it is just a sliver of their core business, which is likely to remain processing crude oil for most. But like integrated oil firms, refiners are venturing into new businesses. US refiner Phillips 66 is buying into the lithium-ion battery industry, signaling a path into storing and distributing electric power. These batteries use specialty coke, which is what Phillips 66 produces from refining crude. Even batteries need petroleum to operate. Key Crude Oil Incremental Refining Values & Margins Average Monthly Prices Recent Average Weekly Prices May Jun Jul Aug 2- Aug 9- ($/bbl) Aug 6 Aug 13 GROSS PRODUCT WORTH (GPW) US GULF COAST Fluid Catalytic Cracking (FCC) Saudi Arabia Lt.-33.3 74.03 77.69 79.34 78.55 78.50 Forties-40.3 78.06 81.65 83.73 83.28 83.31 Bonny Light-34.6 81.40 84.88 86.60 86.03 85.95 Mars-29.6 72.32 76.01 77.66 76.86 76.79 Maya-21.2 61.78 65.72 66.95 65.56 65.45 ROTTERDAM Catalytic Cracking (CC) Saudi Arabia Lt.-33.3 65.69 69.74 71.73 70.62 69.04 Bonny Light-34.6 73.26 77.34 79.76 78.99 77.77 Brent Blend-37.9 69.95 74.07 76.47 75.53 74.41 Urals-31.5 69.07 73.23 75.37 74.16 72.82 SINGAPORE Hydrocracking (HYCRK) Saudi Arabia Lt.-33.3 64.96 69.34 71.74 70.71 69.31 Bonny Light-34.6 69.46 73.31 75.68 74.48 73.19 Oman-33.1 64.89 69.34 71.90 70.95 69.53 Tapis Blend-45.5 68.88 73.01 75.59 74.33 72.96 REFINING MARGINS - GPW VS DELIVERED CRUDE COST US GULF COAST Fluid Catalytic Cracking Saudi Arabia Lt.-33.3 +6.77 +4.87 +6.57 +8.83 +9.50 Forties-40.3 +7.60 +7.26 +6.69 +8.88 +10.82 Bonny Light-34.6 +12.53 +10.42 +9.80 +12.44 +14.43 Mars-29.6 +7.01 +5.34 +7.05 +9.49 +10.13 Maya-21.2 +2.88 +2.53 +2.93 +4.89 +5.73 ROTTERDAM Catalytic Cracking Saudi Arabia Lt.-33.3 -1.28 -1.84 -1.39 -0.95 -1.01 Bonny Light-34.6 +4.51 +2.95 +2.89 +5.29 +5.98 Brent Blend-37.9 +0.44 -0.14 +0.65 +2.66 +2.67 Urals-31.5 +2.39 +1.65 +2.87 +3.53 +4.18 SINGAPORE Hydrocracking Saudi Arabia Lt.-33.3 -3.07 -3.98 -4.00 -4.05 -4.10 Bonny Light-34.6 -0.89 -2.14 -1.94 +1.00 +1.78 Oman-33.1 -0.47 -1.55 -2.22 -1.33 -1.48 Tapis Blend-45.5 -3.31 -0.81 -0.39 +0.63 +1.53 API gravity values used in Energy Intelligence refining model. (r)Revised. Calculations for various

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