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Marathon Petroleum hopeful yet cautious on refining sector recovery


Spiking cases of coronavirus delta variant of concern

Higher natural gas prices a Q3 headwind

Q2 refinery utilization at 94% of capacity

  • Author
  • Janet McGurty
  • Editor
  • Jeff Mower
  • Commodity
  • Oil
  • Topic
  • Coronavirus and Commodities

Marathon Petroleum, the largest US refiner, is "hopeful" that the US refining sector will recover as demand for gasoline and diesel picks up, but remains cautious about the impact of the spreading delta variant of the coronavirus.

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"We are going to have to see how the COVID plays itself out in the second half of the year and [as] we approach another winter season," said Marathon CEO Mike Hennigan on the company's Aug. 4 results call.

Noting the stalled vaccination rate has increased infections, he said "there's obviously going to be some restraint on the demand as a result."

"We're obviously hopeful that people will take caution and get vaccinated," he added.

According to the New York Times coronavirus tracker, there were over 92,000 new cases of coronavirus reported in the US on Aug. 3, an increase of 139% over the last 14 days.

Marathon trims Q3 refinery run rates

Marathon expects to process 2.67 million b/d of crude in the third quarter, down from the 2.71 million b/d in the second. This is due in part to work planned during the third quarter at its Robinson, Illinois, and Mandan, North Dakota, refineries, and weakening demand.

"We're close to the summer driving season, which is typically our strongest time of year," Hennigan said.

"Gasoline demand is currently 2% to 5% below 2019 levels, with the West Coast lagging 10%. Overall, jet demand remains down nearly 30% below pre-pandemic levels," he added.

Wildfires sweeping the Pacific Northwest, parts of Canada and Northern California have reduced demand, while California's coronavirus infection rates have risen. About 10,000 new cases reported on Aug. 3, according to the New York Times.

Regardless of the impact of the coronavirus, Marathon has succeeded in lowering its refining costs to about $5/b in 2021 from $6/b in 2020, said executive vice president and CFO Maryann Mannen on the call. However, that could be changed by the increase in natural gas prices. Used to power refineries, the price of natural gas has risen by about $1/MMBtu and is anticipated to be a "headwind for the third quarter," she said.

Marathon ran its refineries at 94% utilization in the second quarter, up from the 83% in the first, Mannen said, especially in the Midcontinent where cracks improved 57% from the first quarter.

Repositioning the portfolio

Marathon Petroleum's Dickinson, North Dakota, renewable diesel facility reached full design capacity during the second quarter, Hennigan said.

"At approximately 180 million gal/year, Dickinson is the second largest renewable diesel facility in the United States," he added.

Renewable diesel yields at the plant reached the mid-90% level, and the feedstock is currently an 80%/20% blend of soybean/corn oil, despite the high cost of soybean oil.

And Marathon is currently in the engineering and permitting phase of its plans to transform the Martinez, California, oil refinery acquired with the purchase of Andeavor into a renewable diesel facility.

"Based on our progress and discussion with feedstock suppliers, we are confident in the timeline we have set to begin producing renewable diesel in the second half of 2022, with approximately 260 million gal/year capacity," Hennigan said.

The plant will reach full capacity of 730 million gal/year by the end of 2023.

Hennigan declined to discuss the feedstock slate for Martinez, due to ongoing discussions with suppliers.

Phase I of the Martinez startup will be the initial hydroprocessing unit, with later phases including a pretreatment plant, which will allow the company more feedstock flexibility and many different forms of logistics with which to bring in feedstocks.

"We have really strong logistics: pipeline, rail, water, truck," Hennigan said

"And the ultimate logistics is we're in California where we are sitting on the demand," he added.

US West Coast renewable diesel with credits including the state's Low Carbon Fuel Standard and federal taxes is averaging $6.18/gal so far in the third quarter, compared with $5.51/gal in the second, according to S&P Global Platts assessments.

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