Phillips 66 sees strong diesel demand continuing as it approves Rodeo Renewed project in California

Phillips 66 reported strong second-quarter refining results, aided by its higher-than-average diesel yield, as the company made the final decision to convert its Rodeo, California, refinery into a renewables fuel plant, company executives said on the July 29 Q2 results call.

"In refining, we made a final investment decision to move forward with our Rodeo Renewed project to convert our San Francisco refinery into one of the world's largest renewable fuels facilities," said Mark Lashier, Phillips 66's new CEO.

Lashier, who previously served as Phillip 66's chief operating officer and president, said the project is expected to cost about $850 million and begin commercial operations in Q1 2024.

"Upon completion, Rodeo will have over 50,000 b/d of renewable fuels production capacity," he added.

Renewable fuels is a big part of Lashier's new growth strategy for Phillips 66 and the company already has a unit with a capacity of 120 million gal/year operable at Rodeo making renewable diesel.

"What we call our Unit 250 is currently producing renewable diesel. It's performing actually above expectations at this point," said Richard Harbison, Phillips 66's new head of refining on the call.

According to Phillip 66's commercial manager, Brian Mandell, the company has been able to run lower carbon intensity feedstock through the unit. This has helped maximize the value of the credits, including California's Low Carbon Fuel Standard credits, which have dropped to about $92/mt so far in Q3 2022, compared with the 2021 average price of $117.68/mt, according to Platts assessments.

With the drop in credit prices, the California Air Quality Resources Board is looking to change the scope of their lower carbon intensity targets to support higher credit prices, but no decision has been made yet.

"We do think the Rodeo Renewed project is still very attractive," said Harbison, adding that the pre-treatment unit at the plant, which will afford greater feedstock flexibility, will "put us in a competitive position at the facility."

"It's a high return project," said Lashier, adding "it's going to be the lowest capital cost per gallon of any renewable diesel facility that we're aware of."

Benefits of high diesel yield

Phillips 66 reported $3.13 billion in earnings from its refining segment for Q2 2022, running its systems at 90% of capacity with a realized margin of $28.31/b with $223 million in turnaround costs.

During Q3 2022, Phillips 66 expects its worldwide crude utilization rate to be in the mid-90% range.

Q3 pretax turnaround costs are expected to range between $260 million and $290 million due to some turnaround activity planned later in the quarter, Lashier said, but he was positive on Phillips 66 refineries' ability to meet tight demand.

"Crude [differentials] are certainly moving in our favor, and our ability to outperform on distillates versus gasoline will certainly be strong," Lashier said.

"If you look at the fundamentals around the cost curve between the US and Europe, we just can't build any inventory with prompt demand where it is. We're bullish on that outlook as well," he said.

European refiners are looking to run lighter, sweeter crude barrels at the expense of heavier ones due to the high cost of natural gas and higher volumes needed to process more sour crudes. So far in Q3, benchmark Dutch TTF natural gas prices are averaging at $50.40/MMBtu compared with Q2's average price of $30.15/MMBtu, according to Platts assessments.

This is lifting operating costs of European refiners to the $10/b to $12/b range, making US refiners more profitable, but cutting back distillate supply ahead of winter.

"It's hard to see a solver for distillate coming up in the winter. We're at low inventories. If you look in the US, we're at minus 20% versus 2015 to 2019 averages," said Brian Mandell.

With the start of the turnaround season and the return of jet fuel demand, which is eating into diesel supply, the market has been tight and distillate supplies are expected to remain tight ahead of the harvest and heating seasons.

"Cost to produce in Europe, as we just talked about, is expensive versus the US so they're not going to be able to help much. We think there's about 150,000 [b/d] of Russian distillate off the market, which doesn't help much either ... we're distillate-heavy in our system. I think that's going to be a good thing going forward, given our view of distillates," he said.

In its 12 refinery system, which has a total capacity of 1.961 million b/d, Phillips 66 has the ability to make 916,000 b/d of distillates and 1.023 million b/d of gasoline, according to regulatory filings.