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Northern California regulators pass more stringent refinery air quality rules

Highlights

Refiners say BAAQMD underestimates costs

Chevron to investigate legal options

PBF has emissions projects underway at Martinez

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The Bay Area Air Quality Management District, which regulates refineries in the San Francisco, California, area voted 19 to 3 late on July 21 to reduce further particulate matter from the region's gasoline-producing fluid catalytic cracking units.

By voting to amend Rule 6-5, initially passed in 2015, the regulators reduced the total permissible particulate matter emissions to 0.010 gr/dscf -- grains per dry standard cubic foot -- calculated using a four-quarter rolling average.

BAAQMD board members cited the health impact of the residents in affected communities, as well as that of refinery workers, as the reason for tightening the rule.

"We are committed to protecting the health of both refinery workers and neighbors and look forward to implementing this landmark rule with Chevron and PBF," said Cindy Chavez, chairperson of the BAAQMD Board of Directors, in a July 21 statement.

Rule 6-5 applies to the region's four refineries with FCCUs.

One of them, Valero's 145,000 b/d Benicia refinery, already has a wet gas scrubber at the facility which will allow it to meet the new requirements, which are expected to take effect in five years.

Marathon and Phillips 66 have planned to repurpose their Bay Area plants that run hydrocarbons into renewable fuel producers, market sources said. Marathon already shut down its 161,000 b/d Martinez plant in April 2020 due to a fall in refined product demand amid COVID-19-related lockdowns.

Phillips 66, which doesn't operate an FCCU at its 120,200 b/d Rodeo plant, expects the facility to be fully converted to a renewable fuel production unit by 2024.

PBF, CHEVRON TO BE MOST IMPACTED

"BAAQM anticipates that under the stricter standard, PBF/Martinez and CVX/Richmond would have to install wet gas scrubbers, although it is not explicitly required," wrote Tudor Pickering Holt analyst Matthew Blair in a research note.

Chevron has a 245,271 b/d refinery in Richmond, while PBF recently bought Shell's 156,400 b/d Martinez refinery, both of which are operating.

According to the BAAQMD presentation, meeting the new requirement would incur minimum capital costs of approximately $241 million for Chevron and $255 million for PBF.

However, Chevron said the BAAQMD data underestimates the cost of a wet gas scrubber..

"As we have previously communicated to the BAAQMD, the District underestimates the capital costs of a wet gas scrubber. The District estimates the capital costs of a wet gas scrubber to be $241 to $579 million. Chevron has determined that the capital costs are $1.48 billion," said Chevron spokesperson Sean Comey, in an email on July 22.

"In this case, the rulemaking effort is so flawed that we will investigate our legal options to ensure we can meet environmental goals, continue to provide fuels that meet strict environmental standards and save energy jobs in our community," he added.

Paul Davis, president of PBF Energy's Western region, said the company had anticipated the tightening of permissible emissions.

He said in a July 22 statement that the law required the refinery to meet specific emissions standards by 2026, without specifying the installation of a wet gas scrubber or any other specific technology.

"PBF has previously planned projects that will be implemented over the coming months that will allow our Martinez refinery to achieve emissions reductions significantly closer to the desired level in the first quarter of 2022," he said in a statement.

However, some analysts expressed concerns that the compliance cost could make it difficult for PBF to meet the more stringent requirements.

"Given PBF's stretched balance sheet as well as the opportunity to capture upside cracks at Torrance, we think a shutdown of Martinez is a real possibility. However, the implementation date is still five years out and this matter could end up in the courts before that," TPH's Blair said, referring to PBF's Los Angeles area refinery in Torrance, outside of Los Angeles.

HIGHER FUEL COSTS

California drivers already pay more for gasoline than drivers in other states and the state has the nation's highest gasoline tax at 63 cents/gal.

For the week-ended July 19, Californians paid $4.179/gal for regular gasoline compared with the national average of $3.153/gal, according to Energy Information Administration data.

The shutdown of Marathon's Martinez plant was a factor in increasing the cost of gasoline in northern California over that of the southern part of the state.

So far in the third quarter of 2021, S&P Global Platts assessment data showed San Francisco regular CARBOB to be holding an 11.048 cent/gal premium over the front month NYMEX RBOB contract compared with the 7.9 cent/gal premium held by Los Angeles-area gasoline.

"The rule threatens the supply of affordable, reliable and ever-cleaner energy at a time when our regional economy is still struggling to recover from the COVID-19 pandemic," said Chevron's Comey.

REFINED PRODUCT MARKETS STRENGTHEN FOLLOWING NEWS

Gasoline and diesel markets both in the Pacific Northwest and northern California jumped on July 22 following the vote, with the largest day on day gain seen on San Francisco gasoline.

San Francisco CARBOB spiked 7.5 cents/gal July 22 to NYMEX September RBOB plus 17 cents/gal based on a trade at that level. The differential was last higher on June 28 at NYMEX August RBOB plus 19 cents/gal.

San Francisco CARB diesel reached a multi month high on July 22, rising 2.25 cents/gal to be assessed at August ULSD futures plus 6.75 cents/gal. This marks the strongest San Francisco CARB diesel has been since March 24 when Platts assessed it at prompt-month futures plus 9 cents/gal.

Further north in Portland, diesel jumped 5.7 cents/gal to be assessed at August ULSD futures plus 21 cents/gal. The market was last seen stronger on November 19, 2020, when it was assessed at prompt-month futures plus 25 cents/gal.

Portland suboctane rose 2 cents/gal to August futures plus 16 cents/gal.