California refinery conversions face skepticism

Green groups not thrilled with refineries ending petroleum processing. Read this at ArgusMedia.com.


Wariness of petroleum refinery conversions to produce renewable fuels could complicate California’s low-carbon transportation goals.

Skepticism about biofuel’s environmental benefits and growing attention to the pollution endured by communities closest to such facilities will challenge Phillips 66 and Marathon Petroleum plans to establish some of the largest renewable diesel plants in the world.

The companies say they remain confident about their projects. But regulators warn that permitting challenges could frustrate California’s efforts to transform its transportation fuel mix.

“I think there is a higher bar to meet than what it would have been in the past,” said John Gioida, one of five Contra Costa County supervisors who will decide whether to grant final permits for the projects likely next year.

“Communities in the shadow of industry have had to bear an undue burden,” Gioida said. “And we owe it to them to reduce that burden, even as part of permitting these projects.”

Phillips 66 and Marathon Petroleum plan to wind down decades of petroleum fuel production at their Contra Costa County refineries and shift production to renewable fuels.

Contra Costa County planning officials expect to issue by early September draft environmental impact reports analyzing Phillips 66 and Marathon Petroleum’s proposals. The county will take public comment for up to 60 days and must then respond before county supervisors consider approving them, potentially in the first quarter of 2022.

Marathon halted crude processing and converted its 166,000 b/d Martinez refinery to terminal operations last year. The company is targeting 14,000 b/d of renewable diesel production in the second half of next year with an ultimate capacity of 48,000 b/d.

Phillips 66 reached 8,000 b/d of renewable diesel output in July at its 120,000 b/d Rodeo refinery. The company plans more than 50,000 b/d of biofuels capacity when it ceases crude refining there in 2024.

Renewable diesel offers an immediate reduction in greenhouse gas emissions for medium- and heavy-duty vehicles. California anticipates these vehicles will need liquid fuels for decades, even as the state pursues aggressive electrification goals for its transit and light-duty vehicle fleet.

Renewable diesel faces no limits on blending and can move in existing pipelines, terminals and fuel systems. Its production gives refiners credits needed to comply with federal biofuel and California low-carbon fuel mandates.

Renewable diesel made up more than a third of credits generated to meet the state’s low-carbon fuel requirements in the first quarter of 2021. Conversions shut refining units and reduce site emissions. Yet the projects raise concerns about the environmental consequences of supplying such massive renewable diesel projects.

Smaller conversions under construction today in nearly every region of the US would expand renewable diesel production to more than 200,000 b/d in 2024, up fivefold from about 40,000 b/d in 2020. Most of these sites will use at least some soybean oil as feedstock.

Oilseed crushing capacity limits the supplies of these feedstocks. But such demand can entice farmers to expand cropland, groups warn.

“These conversions are very much happening in gold-rush mode,” said Ann Alexander, a senior attorney with the National Resource Defense Council monitoring the California proposals. “You have state officials largely taking positions that are just uncritically supportive.”

Advocates from coast to coast this year have protested the continued use of liquid fuels as extending the burden faced by communities already blanketed by emissions from tailpipes or refinery flares. Converted plants may emit less, but they also can extend the life of a facility for years.

President Joe Biden has given new momentum to a movement broadly labeled as “environmental justice,” specifically referencing it while promoting new national electric vehicle and fuel efficiency goals with the support of US automakers and union workers.

“There is no going back,” Biden said of the transition to electric.

Members of the California Air Resources Board’s (ARB) Environmental Justice Advisory Committee this month expressed frustration with the state’s plan for meeting sweeping carbon reductions goal.

Kevin Hamilton, a committee member and co-director of the Central California Asthma Collaborative, voiced concern that the state was unwilling to go further to cut emissions. “There is this sort of inherent need to support as much of this existing infrastructure as can survive without dramatically impacting it in ways that could in fact disrupt it and maybe even eliminate it in California,” Hamilton said in a recent committee meeting.

Rejecting alternative liquid fuels risks leaving the state short of tools to meet its low carbon goals, regulators warn. Biofuels cut the state’s emissions by 17mn metric tonnes in 2019, according to the board. California’s aggressive pursuit of light-duty electric vehicle infrastructure has not kept pace with state targets. And the heavy-duty vehicle fleet faces more significant obstacles to conversion. The state anticipates heavy vehicles will need liquid fuels into the 2040s.

“We can set ambitious targets,” ARB deputy executive officer for climate change and research Rajinder Sahota said during a summer workshop. “But if, during implementation, we are putting up hurdles through permitting processes or other kinds of processes that need to happen before you can break ground and actually have that production happen, then we are not actually going to realize those reductions and benefits that we anticipate.”

There are other, local reasons to favor transition, supervisor Gioida said. Gioida’s district includes Richmond, where Chevron operates a 250,000 b/d petroleum refinery. Gioida served on the ARB board from 2013-2020 and has served on the Bay Area Air Quality Management District Board since 2006.

Last year’s shutdown of Marathon’s Martinez refinery ended hundreds of union jobs. Losing the refineries mean reducing the local tax base. And in-state production must meet California’s tough in-state standards. Planners must take care to ensure communities that have shouldered the greatest pollution burden see greater benefits from carbon reduction, Gioida said.

“There clearly is sentiment in the community to shift production elsewhere,” Gioida said. “But I think also there is sentiment in communities to benefit from any new projects.”

Refiners must prove the benefits of not cutting straight to zero.

Renewable diesel makes inroads in California

Production of California’s boutique diesel fell last year to the lowest levels in decades as renewable alternatives gained market share in the state.

In-state output of diesel approved for California roads plunged to the lowest fourth quarter volume on record last year, according to the California Energy Commission (CEC), despite available tax data suggesting higher overall diesel consumption. Refiners meanwhile boosted production of non-California diesel to the highest levels in at least two decades and ramped up exports of fuel oil.

Renewable diesel, an alternative diesel that blends seamlessly with its petroleum-based cousin, rapidly grew its market share in the state transportation pool as the mix of diesel supply flipped, according to the California Air Resources Board (CARB). The shift illustrates how US refiners have adapted asa major market seeks to slash their traditional products.

“When we look at opportunities to produce products where there is going to be growth in the market and they are going to have sustainably high margins, we look to renewable diesel,” Valero chief executive Joe Gorder said in October.

CARB crash

California refiners had not since 2003 produced less than an annual average 200,000 b/d of diesel approved for the state’s roads, called CARB diesel. The stretch dated back to before California’s modern fuel requirements took effect. Average production in 2019 fell by a third from 2018, the largest year-to-year decline on record and more than double a 2009 drop as the state navigated a recession.

But California diesel demand was steady for much of 2019, according to a combination of state and federal data. Taxable gallons recorded by the most recent California Department and Tax and Fee Administration data show a 1.3pc increase, to 204,000 b/d, through the first nine months of the year. While short of the more than 2pc increases in implied demand seen for three consecutive years for the same periods in 2015, 2016 and 2017, the modest increase reversed a decline in 2018.

Fuel prices over the course of the year also cannot fully explain the shift, based on Argus assessments. San Francisco CARB and non-CARB diesel were at parity for almost all of 2019, while the Los Angeles market offered a steady premium for CARB fuel. That premium narrowed over the course of the year to within a 7¢/USG range from the previous year’s 9.5¢/USG premium.

Renewable diesel surge

Credit prices to comply with the state’s green fuel standard moved more dramatically. Renewable diesel supported by the state’s Low Carbon Fuel Standard took steadily larger bites of state fuel demand. The fuel, which blends seamlessly with petroleum diesel and can use existing pipelines and other infrastructure, accounted for 10.2pc of the California diesel pool in 2018. Renewable diesel increased that share by more than 60pc to 17.2pc in the first half of 2019, racing past biodiesel as the lead diesel alternative.

Credit prices over the same period increased the spread between average California renewable diesel credits and conventional diesel penalties by almost a third. That gap has doubled since 2017.

US independent refiners Marathon Petroleum, Phillips 66 and Valero and majors Shell and BP have all planned renewable diesel projects. Oil majors Shell and BP have also planned west coast renewable diesel plants. Independent refiner PBF Energy plans to join a proposed Shell plant at the 155,000 b/d Martinez refinery that PBF plans to buy from the major during the first quarter.

Valero already operates an 18,000 b/d renewable diesel plant in Louisiana that it plans to expand to 44,000 b/d in 2021. California’s commitment to the program, along with rising interest in the fuel in Canada, Europe and New York, supported investments in the fuel, Valero senior vice president of alternative fuels Martin Parrish said during a third quarter conference call.

“We think the future demand for renewable diesel just looks very strong,” Parrish said.

New focus

But California refiners did not ramp down overall diesel production, according to the CEC. Non-California diesel production climbed above 200,000 b/d for the first time in CEC records, and stayed there through the last three quarters of 2019. Output of non-California diesel consistently surpassed CARB diesel production for the first time since CEC records began in 1999.

Refiners and traders have not discussed where that production flowed, and federal and state data does not give a complete picture of consumption in neighboring states.

State tax records show that Nevada diesel and biodiesel consumption increased by almost 5pc in the first 10 months of 2019 compared to 2018. Both Los Angeles and Utah supply that state. Arizona state fuels information was not available, and federal data offers only an incomplete estimate of higher consumption for 2019.

Federal export data and vessel tracking by analytics firm Vortexa show fairly typical diesel exports from California over 2019. But fuel oil exports loading from California began ramping up beyond year-ago levels in August as diesel exports shrank, according to Vortexa.

coker

Early warning

Refiners ask US not to block Venezuelan crude

7 Jul 2017, 9.16 pm GMT

Houston, 7 July (Argus) — Sanctions limiting imports of Venezuelan crude could increase US fuel prices and make domestic refiners less competitive, trade group American Fuel and Petrochemical Manufacturers told President Donald Trump’s administration today.

Prohibiting some or all imports from the country may divert the crude to Asian buyers instead of cutting off purchases, AFPM chief executive Chet Thompson said in a letter addressed to Trump.

“While placing sanctions on oil imports from Venezuela would not deny a market for this internationally traded commodity, it would likely hurt consumers and businesses right here in the United States,” Thompson wrote.

Foreign leaders and members of US Congress have pressed the United States for action as Venezuela teeters on government and economic collapse. But the administration, like its predecessor, has preferred non-intervention in the third-largest exporter of crude to the US.

US refiners process millions of barrels of Venezuela’s heavy crude production each year, especially in the US Gulf coast. The oil giant has seen its US market share erode under a combination of rising commitments to Asia and heavy crude flows from sources US customers consider more reliable. Venezuelan imports accounted for 14pc of the average 4.3mn b/d of heavy crude US refiners imported in 2016, according to the Energy Information Administration. The country accounted for 29pc of heavy crude imports in 2003.

coker
A Valero coking unit at its St Charles refinery near New Orleans, Louisiana.

Citgo’s 252,000 b/d refinery in Lake Charles, Louisiana, Phillips 66’s 247,000 b/d refinery in Sweeny, Texas, and Chevron’s 330,000 b/d refinery in Pascagoula, Mississippi, reported the largest average volumes of Venezuelan imports in 2016.

Turning away the crude would greatly reduce the limited volume state-controlled oil firm PdV can sell at full market prices. Oil-backed loan commitments to China and Russia, discounted regional supplies through Petrocaribe and local consumption claim much of Venezuela’s output.

Sanctions could further tighten an already narrow spread between light and medium crude on the US Gulf coast. The regional sour benchmark Mars averaged a $3.25/bl discount to Light Louisiana Sweet (LLS) in the second quarter, down 25pc from 2016 and down by almost half compared to the five-year average. Lower exports from Opec members including Venezuela have helped to reduce that discount. Further cuts to sour exports would add pressure to the US Gulf coast’s heavy refining complex.

Lost barrels could benefit Canadian exports, which steadily increase to the US as Venezuelan exports fall. Heavy crude production from Brazil or Colombia could also benefit from a halt in Venezuelan shipments to the US.

The US Treasury in May said it would review Venezuela’s pledge of part of its US refining subsidiary Citgo as collateral for a $1.5bn loan from Russia’s Rosneft. The US earlier this year sanctioned Venezuelan vice president Tareck El Aissami, who has broad powers in President Nicolas Maduro’s government, and other individuals in Maduro’s circle.

The US State Department condemned an attack on members of the Venezuelan National Assembly by armed government supporters on 5 July and criticized the government’s “increasing authoritarianism.” But the department lacks top policy personnel to address the country. The White House has demonstrated other priorities.

Valero Houston Refinery

Retailers dispute refiners’ proposed RIN changes

Published date: 29 August 2016 at Argus Media

Proposed changes to federal biofuel mandates would slash liquidity for compliance credits without improving prices for consumers, fuel retailers tell Argus.

Vocal refiners facing rising costs have warned that the Renewable Fuel Standard (RFS) encourages market manipulation more than biofuel blending. But retailers including Murphy USA, a frequent target of refiners this year, said the complaints were misdirection.

“For an industry whose margins have collapsed by 50pc, it’s disingenuous to point to this, when I think the bigger issues are staring them in the eyes,” Murphy USA chief executive Andrew Clyde said.

Merchant refiners increased pressure this year to change the structure of federal mandates that require rising volumes of biofuels enter the domestic transportation fuel supply. The mandates measure volumes of biofuels such as ethanol or biodiesel blended with traditional fuel before shipping off to retail stores.

Refiners Valero, PBF Energy, CVR Energy and HollyFrontier all lack infrastructure to fully blend their own production, so they must purchase credits — called renewable identification numbers (RINs) — from blenders that do not need the credits under the program.

The refiners insist the system invites manipulation and blunts the program’s ability to achieve higher volumes of blending. Sellers of RINs have more incentive to profit off scarce credits than to blend fuels, they say, and speculators have helped drive RIN prices to unreasonable levels.

Opponents also claim Murphy and other retailers use revenue from the program to slash fuel prices and pressure smaller competitors.

Refiners have pushed the Environmental Protection Agency (EPA) in rulemakings and courts filings to make blenders obligated to purchase RINs. These efforts to change compliance split the industry, with more integrated downstream competitors reluctant to sign on and the trade association made up of oil majors openly opposed to the idea.

Retailers have remained largely silent in the debate. Murphy rebutted the refiner-proposed changes in comments on blending volumes the EPA proposed this year. A handful of small fuel suppliers also commented, all using similar language to criticize grocers and large retailers making “extra profit from selling RINs,” an echo of the refiner complaints about the system.

Retailers who sell RINs told Argus last week that refiners had exaggerated the program’s influence on their profits.

“The bottom line to us and many, many others is that if the EPA or Congress change the point of obligation, the consumer will pay more for motor fuels and less renewable products will be introduced into the market,” said Mike Thornbrugh, a spokesman for retailer QuikTrip.

QuikTrip declined to comment on its RIN sales revenues or to whom the midcontinent retailer sells the credits. Other privately held retailers contacted by Argus would not respond to questions.

Murphy singled out

No company has been more frequently cited by refiners critical of the program than publicly-traded Murphy USA, an almost 1,400-station chain anchored by Wal-Mart stores. The retailer reports revenue from RINs as a line item, allowing readers to easily track an increase from $5mn in the third quarter of 2013 to a peak of $44mn in the second quarter of this year — a period when the company saw $3bn in total revenue. The Murphy RIN revenue appeared in refiner filings to the Environmental Protection Agency and a Southern Methodist University paper suggesting RINs unfairly grant advantages to larger retailers.

Murphy does benefit from RINs, though not to the degree claimed by refiners, Clyde said. The retailer considers recent net gains of 2¢/USG to 3¢/USG following RIN sales a 9pc to 10pc return on its investment in the infrastructure needed to blend and deliver the fuel. Murphy owns line space on major products pipelines, operates blending infrastructure and purchases biofuels — all costs associated with the business that separates RINs, he said.

“It’s easy for people to selectively pull one number, the other income number, and not net it,” Clyde said. “It’s just as misleading for someone to report the cost of RINs without netting it against the refinery margin that has that increased spot price built into it.”

Refiners argue they cannot compel higher prices at blending racks, or spur those terminals to add biofuel blending capacity. But Murphy said it does see prices increased to offset compliance costs in barrels purchased directly from refiners. And the compliance credits offset a narrow, often negative margin between spot prices and the rack that intensifies when RIN prices climb, Clyde said.

Casey’s Convenience Stores reports income from RINs, but the 14-state retailer owns no blending or terminal infrastructure, chief financial officer Bill Walljasper said. The retailer instead collects RINs through a quirk of Iowa state law, where the company operates roughly a quarter of its stores. Casey’s receives RINs when ethanol splashes into the company’s truck fleet just before heading off to its stores.

Casey’s lacks infrastructure to increase or otherwise manage RIN access beyond the ebb and flow of outright fuel demand, he said.

“We don’t manage our business to RINs at all,” Walljasper said. Rather, the company sells to an obligated buyer twice a month, and had not seen any speculators seeking the credits.

Murphy’s used brokers to place RINs, but the third parties did not take title, Clyde said.

“We see no signs of this quote ‘rigged system’, and we’re selling to refiners either directly or through brokers,” Clyde said.

What the current system does have is liquidity, he said. Shifting the compliance to blenders would slash the volume of buying and selling, leaving all parties, including refiners, with an illiquid market.

Some merchant refiners have begun to draw closer to the distribution business. But midcontinent refiners HollyFrontier and CVR Energy said they cannot acquire such facilities for their midcontinent systems. And Valero doubts it could secure infrastructure to blend all of its production without raising federal market power concerns. The EPA has said it was not the intent of the RFS to change refinery business models.

EPA also cannot change a natural business cycle, Clyde said. US refinery margins for gasoline and diesel have crumbled as the industry’s advantages relative to global competitors faded with the price of oil this year.

“I think the refinery industry has a set of challenges on its hands that are completely independent of the RIN,” Clyde said. “It’s easy for them to look at our other income category and try to point to a windfall profit that doesn’t exist.”