New York — CVR Energy is evaluating a renewable diesel project at its Wynnewood, Oklahoma, refinery -- the latest refiner seeking respite from rising RINS prices and falling demand for refined products resulting from the coronavirus pandemic.
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CVR's Board of Directors did not approve a dividend for shareholders in the second quarter, due in part to ongoing challenges from demand destruction from the coronavirus pandemic and potential opportunities for higher return uses of cash – such as the Wynnewood renewable diesel project.
"I'm pleased to announce that our Board of Directors has authorized engineering studies and the preparation of a final cost estimates for the project to produce renewable diesel at the Wynnewood refinery," said CVR's CEO Dave Lamp on the company's second quarter results call on August 4.
"This project would convert an existing hydrocracker to allow for the production of renewable diesel and also includes tanks, a rail terminal and staging facility. We will retain the flexibility to return the unit to hydrocarbon processing should the economic support doing so," he said, adding the board's decision is expected in September.
The plant's initial design will have between 6,000 b/d and 7,000 b/d of processing capacity and will cost around $100 million, which would put total capital costs between $1 and $1.20/gallon of renewable diesel capacity.
Time crunch for blenders credit
Plans are for the plant to run easily available soybean oil initially as feed which will require a couple of modifications to the process unit.
"The main part of this project really is installing the facilities to be able to bring in bean oil and take out renewable diesel to California. So it's all rail, tankage and loading and unloading systems for the most part. There are a couple of modifications to the process unit, but not a whole lot. So that's why we think we can do it in a year," said Lamp.
"Our real strategy is around the dollar blenders credit, which if you look at it, if we can get 18 months' worth of 6,000 barrels, it basically pays for the investment plus some and gives us optionality," he said.
"In this case, we're able to run the refinery and process bean oil to renewable diesel. And there's varying degrees of opportunity cost there depending on what cracks do. And we like that optionality also," he added.
The biodiesel tax credit – or blenders' credit – gives an income tax credit of $1/gallon for each gallon of pure biodiesel produced or used. It is scheduled to expire in 2022.
Rising RINS expenses, falling demand for gasoline and diesel
CVR's RINs expense declined year over year to $16 million in the second quarter 2020 compared to the $21 million in the second quarter of 2019, despite a rise in RINs prices.
"The year-over-year decrease in RINs expense was due to our RINs purchasing strategy, trading activity and RVO decrease, offset by increased RINs prices," said Tracy Jackson, CVR's chief financial officer on the second quarter results call.
The lower RVO – Renewable Volume Obligations – which is the amount of gasoline and diesel each refiner or blender needs to be in compliance with the Renewable Fuel Standard, will lower the amount of RINs needed to be bought. Jackson did not give the RVO for CVR.
Jackson estimates based on current conditions, 2020 RINs expenses will range between $95 million and $105 million in 2020. RINs prices went up after a ruling which denied small refinery exemptions earlier this year.
"As I said before, we believe the Tenth circuit got it all wrong when they ruled to vacate three small refinery exemptions earlier this year, and we intend to appeal this misguided tenth circuit RFS ruling to the United States Supreme Court," said Lamp.
Lamp notes according to Energy Information Administration forecasts, US refined product demand remains approximately 1 million b/d below pre-COVID levels for the each of major transportation fuels: gasoline, diesel and jet fuel.
"And refinery utilization remained under 80% on average. We do not expect the situation to change significantly anytime soon," he said.
"We've increased our blending to about 25%, and that was from probably '18, '17, somewhere in that neighborhood. And that's through biodiesel blending, the 5% in our base volume. But you're right, RVO is down some. But RIN costs have basically doubled since the beginning of the year," he said.
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