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CVR Energy hedges bets as it focuses on renewable diesel


Renewable diesel demand strong

Refiners look to mitigate rising RINs costs

Production subsidies make economics appealing

New York — Small Midwestern refiner CVR Energy has embarked on its plan to make renewable diesel at its two Midwest refineries, taking advantage of tax credits and lowering RINs costs in a period of weak refining margins.

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The initial step is conversion of the 18,700 b/d hydrocracker at its 74,500 b/d Wynnewood, Oklahoma, refinery to renewable diesel service. But the conversion will not stop CVR from reverting to hydrocarbon processing when economics warrant.

CVR just finished engineering studies, ordered some long lead time items and is entering the permitting stage for the project which will turn soybean oil into 100 million gallons of renewable diesel by June 2021. Much of the output will be railed to California where renewable diesel demand rose 61% in 2019, according to S&P Global Platts Analytics.

CVR joins a host of other US refiners looking to make renewable diesel. The coronavirus pandemic lockdowns cut demand for gasoline and diesel sharply, forcing refiners to make hard decisions about optimal use of their shrinking pile of capital spending dollars to get the best return on investment.

As a result CVR put on hold two hydrocarbon projects which would have increased isomerization capacity and the ability to make lower sulfur Tier 3 gasoline in favor of directing spending towards renewable diesel.

"We still have those in our pocket, but what I see with the macro going forward, refining is probably not the place you want to put your money, except for sustaining capital basis. And that's where we come into play with renewable diesel," CEO Dave Lamp told attendees at Barclays CEO Energy-Power Conference on Sept. 10.

"To us a little bit, this is an option that takes away crude processing capability, but on the other hand, can mitigate RINs fairly effectively," he said.

"Renewable diesel earns 1.7 D4 RINs for every gallon produced. And if we're looking at 100 million gallons a year of production out of our Wynnewood hydrocracker, and that would earn us about 170 million RINs out of our obligation of slightly over 300 million RINs a year," he added.

Renewable diesel mitigates rising RINs costs

RINs prices have been on the rise since the beginning of 2020. A January ruling by the 10th District Court struck down the Small Refinery Exemption waivers for three refineries and pushed RINs prices higher. CVR was directly impacted and is appealing the decision.

The most recent rise in RINs prices earlier this week was spurred by President Donald Trump's direction to the EPA to deny biofuel waivers. This would place an onerous burden on many refiners, especially the smaller ones without blending or RINs generation.

Biodiesel RINs, which averaged 46.81 cents/RIN in the first quarter, rose to 54.15 cents/RIN in the second and so far in the third quarter are averaging 63.98 cents/RIN.

So besides mitigating rising RINS costs, refiners can earn money from federal and local subsidies by making renewable diesel.

"You have a negative gross margin of approximately $1 to $1.50 [/gal], depending on the HOBO spread and the operating cost. And you recoup all that back plus more with the Blenders Tax Credit, Low Carbon Fuel Standard credits and RIN prices. And typically, today, that's running in the $3 range a gallon. So you end up with about $1 to $1.50 margin, depending on a lot of factors in there," Lamp added.

HOBO or BOHO is the price difference between ULSD on the NYMEX and soybean oil futures on the CBOT, and is used as a metric to gauge profitability of making renewable diesel. As the BOHO spread moves higher, the price of RINS rise.

Despite November's presidential election looming, CVR is working so the refinery rail facility can get feed in and finished product out and shipped to California to take advantage of market-based Low Carbon Fuel Standard credits by June 2021, just under the wire to get the $1/gal Blenders Tax Credit.

The BTC is a significant driver of the project, Lamp acknowledges, and like many other refiners CVR believes the credit will be extended past the current expiration date of end of 2022.

Staying flexible

Regardless of the way the election goes, CVR says renewables are here to stay and expects more states, the federal government, and Canada to adopt renewable fuel mandates. To meet this demand the company plans to include more renewable projects at its Wynnewood and Coffeyville, Kansas, plants.

But CVR is not completely shutting the door on hydrocarbon processing at the Wynnewood hydrocracker.

"But the way we're viewing it is, it's an option.... when renewable diesel is profitable, RINs are profitable or high, we can mitigate ours and switch back and forth easily ...with a simple catalyst change on the affected unit," he said.

Lamp said it would take about 20 days to switch out catalysts at the unit and return it to hydrocarbon processing from running soybean oil.

"We don't burn any bridges to go back to refining, and we can play it as an option pretty easily," he added.