HollyFrontier enhances ESG profile, mitigates RINs impact, with New Mexico renewable diesel project

HollyFrontier expects its new renewable diesel unit at its Navajo refinery in New Mexico to be online in the first quarter of 2022, mitigating its exposure to RINs while providing a favorable ESG profile, CEO Mike Jennings said Thursday.

The project, announced in November 2019, was fleshed out on a fourth quarter 2019 results call by Jennings, who, after a four-year hiatus returned, January 1 to the post of CEO.

"The RDU will have production capacity of 125 million gallons per year and allow HFC to process soybean oil and other renewable feedstocks into renewable diesel," he said.

"This investment will provide HollyFrontier the opportunity to provide high-quality, low carbon fuels for our customers while substantially mitigating our annual RIN purchase obligation," Jennings said, referring to Renewable Identification Numbers.

Jennings said the project will generate good return on investment, and has a favorable ESG profile because it reduces the greenhouse emissions attributable to middle distillates.

PAST RINs COSTS RESURFACE AS POSSIBLE PROBLEM

HollyFrontier is focused on RINs costs because the company lost a Small Refinery Exemption (SRE) for its two Rockies area refineries.

"On the 24th of January, the Tenth Circuit [court] handed down a decision, which vacated the SREs for three refineries, which included our Cheyenne and Woods Cross plants for the year of 2016," said Rich Voliva, HollyFrontier's CFO, on the results call.

The Cheyenne, Wyoming, plant has a 48,000 b/d capacity while Wood Cross, Utah, refinery has a 39,330 b/d capacity. The company applied for the exemption to reduce the amount it spent buying RINs credits to meet assigned Renewable Fuel Standard (RFS) volumes.

"We believe the decision is wrong. The Renewable Fuel Standard holds that refineries can apply for an SRE at any time and the EPA [Environmental Protection Agency] should be able to grant them at any time without any regard to whether a refinery has received an extension each year since the beginning of the program," he added.

Voliva said HollyFrontier booked the RINs cost in 2016 at $60 million, but it is unsure how the ruling impacts HollyFrontier's bottom line.

"Obviously, there are no 2016 RINs in existence anymore...this was remanded back to the EPA for corrective action, but we have no idea what that action would look like," he said, adding "we don't think this is going to stand up anyways."

Voliva said HollyFrontier will appeal the ruling and while this decision, which will have broader implications for the national arena. The Tenth Circuit Court of Appeals purview covers Colorado, Kansas, New Mexico, Oklahoma, Utah and Wyoming.

"There's no realistic way this could or would be applicable only within a few states. Obviously, EPA is worried, they can't make up the lost volumes for SREs," he said, adding that the EPA needs to look at that reallocation of SREs in 2020.

'STICKING WITH THE BEEF'

Opting to build a biodiesel renewables plant will help HollyFrontier in creating more RINs going forward, as biodiesel RINs continue to hold a significant premium to ethanol RINs. So far in the first quarter of 2020, calendar year 2019 ethanol RINs are averaging 10.92 cents/RIN, while calendar year 2019 biodiesel RINs are averaging 46.20 cents/RIN, S&P Global Platts assessments show.

HollyFrontier has the necessary permits for the Navajo renewables plant and has already broken ground, said Tom Creery, HollyFrontier's head of supply.

"It's a good fit for us to start the renewable diesel effort at that location," he said, adding it has the necessary logistical infrastructure in place and plenty of land.

"We're going to have flexibility to run a variety of different fuels. We've looked at soybean to begin with," he said.

"I think a big key in these renewable diesel plants is fuel flexibility, and we're certainly going to build towards that to be able to take advantage and remain competitive in the marketplace," he added.

Besides using vegetable oils as feedstock, Creery said HollyFrontier is looking at some animal fats as well.

"We're currently looking at tallow right now, and we haven't looked at some of the other ones such as hog fat, things like that. We're just sticking with the beef products for right now.," he said.

This is just the first step into the renewables space for the refiner, who likens finding feedstock to sourcing crude for their refineries.

And HollyFrontier sees opportunity through organic projects as well as acquisitions to increase its renewable and ESG footprint.

"We see internally is that there's tremendous opportunity for organic improvement and significantly in the renewable diesel space and renewable fuels," Jennings said, adding that acquisitions of renewables are also a more likely focus than traditional refining assets.