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FEATURE: US refiners accelerate plans to reconfigure plants

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FEATURE: US refiners accelerate plans to reconfigure plants

Highlights

Push towards renewables moves forward on tax incentives

US refiners borrowing heavily: S&P Global Ratings

Refined products demand edging higher

New York — Facing demands for cleaner energy, some US refiners have accelerated plans to reconfigure plants even as questions remain about demand recovery from the coronavirus pandemic.

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Phillips 66 on Aug. 12 announced plans to turn its 120,200 b/d Rodeo refinery in California into the world's largest renewables fuel project, replacing crude with organic feedstock like cooking oil, fats, greases and soybean oils to make renewable diesel, renewable gasoline and jet fuel.

It will also permanently shut its 44,500 b/dSanta Maria, California, refinery, which traditionally supplied intermediates to Rodeo for final processing.

Phillips 66 did not put a price tag on the cost of the project, but the company has one of the stronger balance sheets among US refiners, giving it flexibility.

Phillips 66 is one of four US refiners with an investment grade rating from S&P Global Ratings, which allows them pay less for the money they borrow, even as the sector as a whole has borrowed more.

Ratings senior director for Energy Infrastructure and Refining Michael Grande said that US refiners borrowed heavily when the pandemic struck.

Grande put total borrowing at "a billion plus" dollars, with companies taking on "debt as insurance policies."

And the rate at which refined product demand recovers will be important to increase cash flow, according to Grande. If the third and fourth quarters are bad, the refiners will be forced to "eat into the money they just borrowed."

S&P Ratings' three other US investment grade refiners -- Valero, Marathon and HollyFrontier – all have plans to increase their capacity to make more renewable fuel, particularly diesel. US renewable diesel production has risen 13.1% year on year in the first half of 2020 to 262 million gallons, according to the Environmental Protection Agency.

"Supported by a $1/gal federal biomass-based blending credit, rising [Renewable Identification Number] values and a favorable carbon-reduction profile, renewable diesel is thriving in the US despite the adverse effects of the coronavirus pandemic," said Corey Lavinsky, biofuels analyst with S&P Global Platts Analytics.

Marathon recently announced it will turn its 161,000 b/d Martinez, California, oil refinery into a renewable diesel plant. The plant was shuttered in April, along with its 26,000 b/d Gallup, New Mexico, plant, which will not reopen as a refinery.

Like Phillips 66, Marathon will get additional credit from California's Low Carbon Fuel Standard credit system on top of the federal benefits, which also include 1.7 RINs for each gallon of renewable diesel made.

Lavinsky says renewable diesel in California commands around a $1.54-$1.85/gal premium due to the LCFS credit, depending on the carbon intensity value of the fuel

PBF considers biofuels

PBF Energy's CEO Tom Nimbley said on the company's July 31 earnings call that PBF also plans to do something with renewables at its recently purchased 156,400 b/d Martinez facility. However, the company was constrained by cash flow from the sharp fall in demand from the coronavirus pandemic, he said. PBF bought the Martinez refinery from Shell in February.

PBF is also looking at its 182,200 b/d Delaware City, Delaware, refinery on the US Atlantic Coast.

"There's some other opportunities that we were looking at prior to the pandemic in Delaware City along the same vein," Nimbley said. "We do feel the need in terms of that prioritization ... is that you get back demand. Utilization goes up. Cracks go up. The diffs go up. Generate the cash. De-lever the company."

At least one small Midwest refiner is looking to take advantage of the California's LCFS credits, even it means cutting back on other expenditures.

CVR Refining cut its second-quarter dividend, opting instead to use the cash to fund a new renewable diesel project at its 74,500 b/d Wynnewood, Oklahoma, refinery, using the refinery's existing logistics with an with an eye to moving the product to California via rail.

"The main part of this project really is installing the facilities to be able to bring in bean oil and take renewable diesel to California," said Dave Lamp, CVR's CEO on the company's Aug. 4 earnings call.

The project, which is expected to be approved by CVR's board of directors in September, would convert an existing hydrocracker to allow for the production of renewable diesel.

"And our real strategy is around the $1 Blenders Tax Credit," Lamp said. "If we get 18 months of 6,000 barrels it basically pays for the investment and then some."

Utilization increases

Refined product demand has been rising slowly as coronavirus restrictions have eased.

Implied US gasoline demand is averaging 8.7 million b/d so far in third quarter, US Energy Information Administration data shows, after averaging 6.9 million b/d in the second quarter. But third quarter gasoline demand so far still significantly lags the 9.5 million b/d seen in Q3 2019.

US implied distillate demand has averaged 3.52 million b/d so far in the third quarter, up from 3.35 million b/d in Q2, EIA data showed. Still, that's down from a Q3 2019 average of 3.84 million b/d.

Refiners have been cautiously increasing refinery run rates, reaching 81% for the week ended Aug. 7, but there is still a lot of spare US refining capacity, which topped over 20 million b/d in 2020.

RECENT REFINERY CONVERSIONS

Company

City

State

PADD

Fuel

Capacity million gal/year

Capacity b/d

Feedstock

Status

Online

Chevron

El Segundo

CA

V

co-process biofeed in FCCU

NA

NA

soy and other organics

work in progress

Q42020

CVR

Wynnewood

OK

III

renewable diesel

100

6,500

soy and other organics

engineering

Q32021

Global Clean Energy

Bakersfield

CA

IV

renewable diesel

NA

organic feedstocks

work in progress

Q42021

HollyFrontier

Artesia

NM

III

pre-treatment unit

NA

organic feedstocks

HollyFrontier

Artesia

NM

III

renewable diesel

125

organic feedstocks

under construction

Q12021

HollyFrontier

Cheyenne

WY

IV

renewable diesel

200

organic feedstocks

Q12021

Kern Oil and Refining

Bakersfield

CA

V

renewable diesel

3.5

NA

active

Marathon

Dickinson

ND

III

renewable diesel

12,000

soy and other organics

Q32020

Marathon

Martinez

CA

V

renewable diesel

735.8

48,000

organic feedstocks

2022

Phillips 66

Rodeo

CA

V

renewable diesel, gasoline and sustainable jet

680

oils, fats, greases

2024

Phillips 66

Rodeo

CA

V

renewable diesel

120

oils, fats, greases

Q42020

RECENT REFINERY SHUTDOWNS

Company

City

State

PADD

Date

CDU Capacity b/d

Calcasieu

Lake Charles

LA

III

Temporary shut down

8/1/2020

135,000

HollyFrontier

Cheyenne

WY

IV

Renewable conversion

8/1/2020

48,000

Marathon

Gallup

NM

III

Shut down

4/10/2020

26,000

Marathon

Martinez

CA

IV

Renewable conversion

2020

161,000

Phillips 66

Rodeo

CA

IV

Renewable conversion

2020

120,200

Phillips 66

Santa Maria

CA

IV

Shut down

2023

44,500