US renewable diesel production faces headwinds from high feedstock costs

The growing popularity of repurposing or building renewable diesel facilities by US refiners and others seems to have hit a roadblock, as growing demand for feedstock is pressuring supply and price.

CVR Energy has decided, for the time being, to keep the hydrocracker at its Wynnewood, Oklahoma, refinery in "oil service" rather than take the unit down to complete the renewable diesel conversion process because of the high cost of renewable diesel feedstocks, CEO Dave Lamp said Aug. 3.

"Renewable diesel feedstock prices have increased considerably, particularly for refined, bleached and deodorized soybean oil, to a level where economics do not make sense for us to complete the conversion at this time," he said.

According to S&P Global Platts Analytics, renewable diesel production is expected to reach 4,081 million gallons annually by 2025, compared with the 538 million gallons produced in 2020.

The majority of new US renewable diesel facilities plan to use soybean oil because of its easy availability and relatively low carbon intensity, which improves the economics for complying with the US Environmental Protection Agency's Renewable Fuel Standard and California's Low Carbon Fuel Standard.

However, increased transportation fuel demand for soybean oil has also increased its price, which has pulled up the costs of other renewable fuel feedstocks like beef tallow.

So far in the third quarter, CBOT soybean oil prices are averaging 65.33 cents/lb, compared with a 31.32 cents/lb average for 2020, according to S&P Global Platts. Chicago packer beef tallow prices are averaging 61.73 cents/lb so far in the third quarter, compared with a 31.56 cents/lb average in 2020.

Soybean oil supply is constrained by other factors unrelated to transportation fuels, including soybean's traditional agricultural value chain, including farming and agricultural demand.

Changing demand patterns

"The problem we have is that there is more demand for soybean oil than there is for soybean meal," said Pete Meyer, agricultural commodity analyst at Platts Analytics.

"A pound of soybean oil has to be four times the price of a pound of soymeal for a crusher to crush for oil, and right now it's about three and a half," he said, adding soymeal prices are currently depressed at about $350/st rather than the $400/st based on the higher oil price.

Meyer said smaller hog herds have cut demand for soymeal, forcing excess meal to be stored in rail cars.

Meyer noted the current pace of soybean oil sales and exports for the 2020-21 marketing year, which ends on Aug. 31, 2021, suggests annual exports will fall to 1.55 billion lb, about 200 million lb below the USDA's latest estimate of 1.755 billion lb made in July.

This would be "devastating to oil bulls but welcomed by the renewable diesel community," Meyers said, as it would increase starting stock levels for the 2021-22 market year which runs from Sept. 1, 2021, through Aug. 31, 2022.

"Platts Analytics believes that 80 to 100 million lb will eventually make its way into beginning stocks for 2021-22 as the other half of lowered exports will be used in the biofuels category, pushing that number up to 9.4 billion lb in old crop," Meyer said.

Estimates are for 12,000 million lb of total US soybean oil supply of 28,370 million lb to be used in biofuels in 2021-22 year.

Pretreatment ahead

Calumet Specialty Partners, which is planning a renewables diesel plant at its Great Falls, Montana, refinery, noted that every renewable diesel plant in the US needs a pretreated feed to run.

"The question, does the pretreater sit on your side, or is some kind of industry service at the processing point?" Bruce Fleming, Calumet's head of renewables, said Aug. 6.

Fleming said putting the pretreatment plant on site gives greater feedstock flexibility to run more than soybean oil and take advantage of other local crops like canola and camelina.

"What you are seeing in the markets is mostly a distortion due to lack of pretreating capacity. It's not lack of crops," he added.

CVR still plans to build a pretreatment plant for its Wynnewood facility, expected online by Q3 2023.

But CVR's Lamp feels that may not lower soybean oil prices enough.

"The problem is that all the bean producers recognize that 28 cent/lb vantage there. They are really not offering a lot of untreated bean oil to the market because they can make more money by refining that," he said, adding "the crush plants are making a fortune on it right now"

But Lamp noted that its Midcontinent location gives it access to many different kinds of feed, including rendering and ethanol plants.

"We're going to be working with the feeds in our backyard," he said.