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Marathon weighs converting idled Martinez refinery into renewable diesel plant

Marathon Petroleum Corp.'s decision to idle its 161,000-barrel-per-day Martinez refinery in California came down to pressure from regulators and investors as well as cost, executives said during the company's Aug. 3 earnings call.

Marathon plans to convert the facility into a terminal, and executives are weighing whether to redirect money the company would have spent on scheduled maintenance toward converting it into a 48,000-bbl/d renewable diesel production plant.

"We are a believer that the renewable positioning is going to be beneficial to us because it aligns with California's low-carbon fuel standards," Marathon President and CEO Michael Hennigan said. "We've also stated [Marathon] has greenhouse gas reduction targets that we want to accomplish throughout the decade. So, strategically, this fits with where our thinking is."

In March, Marathon announced it would align executive compensation with greenhouse gas efficiency goals.

Hennigan said the cost of the first phase of the project would require "about the same amount of capital that we would put into a planned turnaround" at the facility. "So we really hit a decision point and decided to pivot and look at renewable diesel production as opposed to refined product production," he said.

Executive Vice President of Refining Raymond Brooks said the project could begin operating in 2022 and that capacity could ramp higher from there. As an oil refinery running at full utilization, Brooks said Martinez produces 54,000 bbl/d of ultra-low-sulfur diesel.

"The key there is the renewable diesel is a demand element in the market, so it puts us in a really good position to not be the exporter in the market, [but] to really help penetrate the market with what's being demanded out on the West Coast," Marathon Senior Vice President of Marketing Brian Partee said.

"I want to emphasize that this is not a grassroots facility, so there is an element of speed of conversion. We believe that we have an early mover advantage, and … that there are opportunities for meaningful partnerships with feedstock suppliers," Brooks said.

Marathon executives said they also decided to idle the company's 26,000-bbl/d Gallup refinery in New Mexico after failing to find a buyer for the facility. In the spring, Marathon had idled both refineries — together they employ 960 people — on a temporary basis, citing reduced demand from the COVID-19 pandemic.

"It's never good when a company has to close 6% of its refining capacity, especially when other permanent U.S. closures have been so limited [year to date]," Tudor Pickering Holt & Co. analysts wrote Aug. 3. "However, the move will likely lower [Marathon's] unit costs as well as tighten up the Southwest and West Coast markets for its remaining refineries."

"The [West Coast] market has long been described as one refinery too long," the analysts said. "Going forward, expect any unplanned outages to have a disproportionate impact on [West Coast] cracks." They said Marathon's decision would benefit refiners with West Coast exposure, including PBF Energy Inc., Par Pacific Holdings Inc., Valero Energy Corporation and Phillips 66, as well as those with Southwest exposure, including HollyFrontier Corporation and Delek US Holdings Inc.

After Marathon idles Martinez, it will have 482,000 bbl/d of remaining oil refining capacity on the West Coast.

"I think taking Martinez down is certainly directionally helpful," Partee said of the market. "It's a fundamental shift not only in the West Coast balance, but certainly to our book. … It has a direct impact on how we think about medium and long term about the assets out on the West Coast. … This really just levers that and puts us into a different gear out west. … We've always run the Midwest as a system. And the West Coast has largely functioned in a similar manner, and we see this as directionally helpful to help us optimize the system overall."