Renewables Boost Profits and Drive Refinery Conversions

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Renewable fuels are already delivering fat profits for oil refiners, especially in North America where the low-carbon road fuels sector has emerged as a rare bright spot for the downstream during the pandemic. Current cash flows center on renewable diesel, which already has the right government incentives in place and has benefited from more resilient demand for road fuels during Covid-19. But the pandemic has seen a flurry of sustainable aviation fuel (SAF) purchases by airlines which will help guarantee strong SAF demand in the future. Renewable fuels accounted for barely 10% of US refining giant Valero’s business but generated half of its second-quarter profits, according to the firm’s latest financial results. It’s a picture that is being repeated throughout the US and is triggering a spate of refinery conversions and purchases. Private equity firm Cresta Fund Management recently acquired North Atlantic Refining's idled 135,000 barrel per day Come-by-Chance refinery in Canada with an eye toward converting the plant to produce SAF (JFI Jul.30'21). Valero is focused on biodiesel but its Senior Vice President for Alternative Energy Martin Parrish says SAF is a question of “when rather than if,” provided more government incentives are provided. Revamping existing oil refineries to make SAF using the hydrotreated esters and fatty acids production pathway is cheaper than building a stand-alone plant, but the costs are still significant and much higher for SAF than renewable diesel. “To make renewable jet or SAF, you have to have some additional equipment. ... You're probably going to add a reactor and you're certainly going to add a fractionator. So that's additional capital,” Parrish explains. The bulk of refinery conversions so far have all been for biodiesel which is much more straightforward. Holly Frontier has just acquired Sinclair Oil’s downstream activities, notably its renewable diesel facilities. And Marathon Petroleum continues to work on converting the Martinez, California, refinery to produce renewable diesel. The US Energy Information Administration expects renewable diesel production to grow from roughly 30,000 b/d last year to over 330,000 b/d by the middle of the decade as more oil refineries are converted. More Government SAF Support Needed Current renewable profits are almost entirely dependent on policy support for low-carbon road fuels and lucrative tax credits. Producing renewable fuel is far more expensive than traditional petroleum refining, yet the finished biodiesel is indistinguishable from conventional fuel so doesn’t earn any price premium. “At the end of the day, to get [SAF] equal to renewable diesel, you're going to have to get some help on the side with some additional pricing mechanism and additional green premium there,” says Parrish. In the US, ground zero for policy support has been California where the state’s low-carbon fuel standard sits on top of the federal renewable fuel standard. Stratas Advisors reckons all of California’s tax credits, subsidies, and the ability to generate and sell carbon-offsetting credits known as renewable identification numbers (RINS) combined earn refiners more than $3 per gallon. And the value of RINS has jumped significantly since Stratas released its report suggested the figure is now even higher. SAF also faces much higher feedstock costs than renewable diesel. Renewable diesel producers mostly use soybean oil in the US while emerging SAF producers need to avoid food crops and use waste oils and tallow in order to be compliant with the UN’s carbon offsetting and reduction scheme for international aviation (JFI Feb.12'21). Holly Frontier thinks the rapid growth of biodiesel could help boost feedstock supplies for SAF as well as biodiesel, if higher soybean prices encourage municipal waste agencies and restaurant chains to better organize waste oil supply chains. The firm told analysts after its Sinclair purchase that it expects advantage feed such as cooked vegetable oil, tallow and water-degummed soybean oil to account for three-quarters of its total biodiesel feedstock. Frans Koster, New York

Biofuels (incl. SAF)
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