Renewable diesel could be a lifeline for US Jones Act Tankers

The increase in US renewable diesel production scheduled to come onstream in 2022 and beyond could prove to be a lifeline for the beleaguered Jones Act tanker shipping sector.

This small niche market is comprised of "Blue Water" tankers, which travel the US coastline carrying crude oil and refined products. The tankers saw their US crude oil franchise fall apart Christmas 2015 with the lifting of the crude oil ban, and then again in 2019 when the pandemic cut US refined products demand.

"There was limited demand for transportation. We happened to the most exposed to that and took it on the chin in 2021," Sam Norton, CEO of Tampa-based Overseas Shipholding Group said in an interview with S&P Global Platts. "Now RD is emerging as a possible replacement of that. And could, if all things were to go right, create the same kind of tight market that we saw in 2012, 2013, 2014 when crude oil was screaming to be moved."

As US Gulf Coast RD output grows, producers are looking to move their product to California for the state's lucrative Low Carbon Fuel Standard credits. While LCSF credits have softened with RD production growth, US West Coast RD prices with credits have risen in 2022, averaging $6.76/gal through Feb. 15, compared with the $6.40/gal average in fourth quarter 2021.

Rapid RD growth seen in 2022

US RD production capacity reached 1 billion gal/yr in 2021 and the output is expected to grow rapidly in 2022 as new projects come online, according to S&P Global Platts Analytics.

"What I have seen in the last 12 months is, as the volume of RD production in the Gulf of Mexico has increased, it's created enough opportunity to get the scale to use a ship," Norton said.

"The volumes are now there. There are three Jones Act vessels that are full-time dedicated to transporting RD from the Gulf Coast to California," he said, adding "one of them is ours."

Valero chartered OSG's Overseas Key West 320,000-barrel tanker in November to carry RD from its joint-venture Diamond Green Diesel facility in Norco, Louisiana, to its 85,000 b/d Wilmington, California, refinery.

DGD, also owned by feedstock supplier Darling Ingredients, finished the expansion of the facility to 690 million gal/yr of RD in October 2021 -- ahead of schedule. It also makes 30 million gal/yr of renewable naphtha.

The joint venture is expanding, which bodes well for OSG and other Jones Act tanker operators.

Operations at the new DGD plant at Valero's Port Arthur, Texas, refinery are slated to begin in the first half of 2023, with a capacity of 470 million gal/yr of RD, increasing DGD's RD production to about 1.2 billion gal/yr and renewable naphtha production to 50 million gal/yr.

Valero has also fixed another vessel to deliver RD in March in California, Norton said.

Biofuel company Renewable Energy Group fixed a tanker with Kinder Morgan in December to bring RD from their 90 million gal/yr facility in Geismar, Louisiana, to California, according to Norton.

More vessels needed

Vessel travel time to California from the USGC is 30 to 36 days. Assuming that all RD production is going to California, Norton estimates the new USGC RD capacity due to come online will increase Jones Act Tanker demand by five or six ships.

"It would be extremely important for the Jones Act," he said, noting that would be a 10% swing in demand for the 43 currently active Jones Act Tankers. "It would throw the market in chaos."

The earliest delivery time for a new Jones Act tanker is 2025 or 2026, given US shipyards are fully subscribed with other projects.

Demand for Jones Act Tankers could expand if other states initiate a Low Carbon Fuel Standard similar to California's.

"But I think the lion's share will be going to California. So, my view is that RD for the next five, 10 years is going to be an important factor in the Jones Act transportation market," Norton said.

OSG has been in discussion with other RD producers about moving their product to California from the USGC, as more projects come online or are closer to fruition.

Some projects located in the Midwest have opted for shipping by rail, due to a lack of access to a port. But for coastal RD producers, waterborne transportation has an advantage.

Recent movements of RD from the USGC to California have cost about $10/b, plus or minus 10%, compared with $16/b by rail, according to Norton.

"The cost to ship RD to California on a Jones Act vessel is still less expensive -- and safer -- than shipping by rail," Norton said.