Refiners integrate for renewables

A look at the investments underway to shift refineries from crude oil to bean oil. Available to read at and property of ArgusMedia.com.

Petroleum refiners have committed billions of dollars to speed up expansions beyond the oil patch and into bean fields.

Oil major Chevron’s $3.2bn acquisition of US biofuels company Renewable Energy Group (REG) disclosed this week tipped the scales on a new wave of investment rushing through the feedstocks sector. The rush to convert under-performing oil refining equipment to produce more lucrative renewable diesel for the US brings established energy traders into unfamiliar markets.

“It is an area that we do not — to be completely blunt, we do not have deep expertise,” Chevron chief executive Mike Wirth said. “We have been moving into these markets, but REG brings decades of experience and people that relationships, insights, technical understanding that we simply do not have.”

US refiners have plunged into renewable diesel production to balance federal environmental obligations, extend the life of less competitive equipment and capture state and federal incentives for the drop-in diesel fuel.

Refiners leverage assets already connected to power and logistics networks and their operating expertise. Valero, Phillips 66, Marathon Petroleum, BP, Chevron and HollyFrontier have already converted or partnered on facilities to produce renewable diesel in the US.

A federal blender’s tax credit — slated to expire at the end of this year — and state low-carbon fuel standards (LCFS) along the west coast help make renewable diesel competitive with conventional supplies. But refiners comfortable wringing margins from a dizzying array of petroleum feedstocks must now enter global agricultural markets.

Few elected to do that alone.

The REG acquisition would roughly double Chevron’s renewables feedstock access already bolstered in early February through a joint venture with agribusiness giant Bunge. Neste this week announced a $1bn investment in Marathon Petroleum’s planned renewable diesel conversion in Martinez, California, which Neste says would make it the first company to produce the fuel in Asia, Europe and North America. Marathon previously created a soybean processing joint venture with US agribusiness ADM.

Valero partner Darling Ingredients has pursued a $1.1bn acquisition of fats and oils collector Valley Proteins to buttress supplies to their Diamond Green Diesel joint venture, the largest US producer of renewable diesel. ExxonMobil in late February acquired a 25pc stake in Global Clean Energy Holdings (GCEH), which plans to produce renewable diesel from camelina feedstock processed at a converted Bakersfield, California, refinery. The major also acquired a 33pc interest in a GCEH feedstock subsidiary.

US independent refiner CVR Energy expected its fertilizer business and farm belt operations to lead to a partnership with a feedstock supplier for renewable diesel plans in Oklahoma and Kansas. But not all refiners want to split projects. HollyFrontier said it had looked at about 20 proposed oilseed crush projects that lacked sufficient benefits for the vertical integration.

“We have not seen returns that are clearing any sort of hurdle, which is pushing us back toward just an outright lifting or an offtake agreement,” HollyFrontier Renewables president Tom Creery said.

Farmers’ market

The jostling will transform the flows of fats and oilseeds. LCFS markets prize used cooking oils and collected fats as low-carbon feedstocks. But the US collects nearly all of the available domestic supply, meaning there is little room to grow that feedstock alongside renewable diesel demand.

The fuel will instead shrink US soybean exports or even flip the US to a net importer, and draw opportunities for canola or other oils in as feedstocks, according to agribusiness firms.

“There is going to be a daisy chain effect that goes on, which, frankly, is actually supportive for the entire vegetable oil complex,” ADM chief financial officer Ray Guy Young said.

Farmers will explore additional production options, including cover crops or varietals enhanced to boost oil potential, according to Bunge.

“I think it is going to take, kind of, everything to supply that industry,” chief executive Greg Heckman says. “We think we are right in the bull’s-eye of that.”

By Elliott Blackburn

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.

US gasoline cracks fall to negative territory

Read this at ArgusMedia.com: Published date: 17 March 2020

Benchmark gasoline prices fell below regional crude settlements yesterday in major US fuel markets, a rare spring inversion responding to the demand destruction of a global effort to contain the spread of the new coronavirus.

Regional sweet benchmark crudes settled higher than corresponding gasoline benchmarks in the US Atlantic, Gulf and west coasts and the midcontinent, based on Argus assessments. Gasoline in each case was worth less than a barrel of certain sweet crudes purchased to produce it. The fuel retained a premium to sour crude benchmarks in the US Gulf coast, midcontinent and in the Los Angeles, California, market. Overall refining crack spreads — a measure of refinery profitability — were sharply lower but kept positive on the strength of diesel margins.

Cities have ordered residents to shelter in place, states have closed restaurants and bars, and the federal government yesterday urged anyone able to work from home for the next two weeks to do so to limit the spread of the coronavirus. Deep cuts to gasoline consumption were inevitable, though not yet quantified by the Energy Information Administration.

The gasoline discounts to crude happen occasionally, including last February in the New York Harbor, US Gulf coast and midcontinent markets. The reversal more often occurs in January or February, when US gasoline demand shrinks. But they last happened at the same time across these four regions in December 2014.

A barrel of Buckeye RBOB in the New York Harbor fell to a $3.23/bl discount to Brent. Colonial M grade conventional gasoline fell to a 56¢/bl discount to WTI Houston and a 36¢/bl discount to Light Louisiana Sweet (LLS). San Francisco CARBOB dropped to a 18¢/bl discount to Alaskan North Slope (ANS). No market began March below a $5/bl premium to their respective regional crude.

Diesel premiums to crude settled yesterday above the five-year weekly average in the Atlantic and west coasts. But refinery margins yesterday settled at least 50pc lower than that same five year average period in every region.

The Nymex April RBOB contract settled today at 71.14¢/USG, higher by 2.15¢/USG than the previous settle. Regional differentials to that benchmark were falling in the US Gulf coast, Chicago and San Francisco markets. New York Harbor Buckeye RBOB was slightly higher from yesterday’s midpoint in afternoon trade.

By Elliott Blackburn

Ruling affirms Citgo risk to Venezuelan debts

Appellate judges today affirmed that companies may seek shares of entities controlling US independent refiner Citgo to satisfy billions of dollars in Venezuelan debts.

The decision could upend control of Venezuela’s most valuable overseas asset and a key anchor to the impoverished country’s loans, opening a path to compensation for more than a dozen entities with assets expropriated by Venezuelan governments. An auction of Citgo shares could move forward as early as September unless the US Treasury’s Office of Foreign Assets Control (Ofac) declares such transactions blocked by US sanctions, a senior financial sector executive close to Venezuela’s creditors told Argus.

The unanimous three-judge panel also rejected arguments that third-party bondholders must be considered in reaching that decision, finding that any lenders to national oil company PdV had ample notice of the government’s involvement in the company.

Venezuelan attorneys argued that the country’s interests in Citgo were immune from such attachments. But the US Third Circuit Court of Appeals panel found that Venezuela’s involvement in PdV easily cleared a legal determination that the company effectively served as alter-ego of the Venezuelan government, and that entities seeking assets to satisfy numerous arbitration awards could attach its US companies controlling Citgo.

“Indeed, if the relationship between Venezuela and PdV cannot satisfy the Supreme Court’s extensive-control requirement, we know nothing that can,” the opinion said.

Judges affirmed a district court finding last fall that Citgo assets were directly held by Venezuela despite the use of US subsidiaries. That finding allowed the defunct mining firm Crystallex, now controlled by New York-based investment firm Tenor, to seek payment of a $1.2bn arbitration award for Venezuela’s expropriation of the company’s Las Cristinas gold mining assets almost a decade ago.

“The Third Circuit’s decision is a crucial step in getting Venezuela finally to honor its legal obligations,” Crystallex chief executive Bob Fung said. “We look forward to proceeding with our lien to recover at least part of our expropriated investment in Venezuela.”

PdV did not comment, and Citgo and Treasury did not respond to requests for comment.

Appellate court judges in Philadelphia questioned in an April hearing why Citgo should be immune from the billions of dollars of debts accrued by the Venezuelan government. The panel said today that Venezuelan national oil company and Citgo owner PdV failed to show significant separation between the government and the national oil firm.

Citgo’s 750,000 b/d of complex refining capacity and fuel network west of the Rocky Mountains make a lucrative target for the country’s creditors, who seek more than $150bn. These most valuable overseas assets fall subject to the US court system and an executive branch that does not recognize President Nicolas Maduro’s government.

That change in White House recognition has rippled through more than a dozen separate petitions in US courts for recognition of arbitration awards for expropriated assets over the past decade. The US-recognized opposition headed by National Assembly leader Juan Guaido repeatedly requested judges overseeing petitions from oil services companies, defense contractors, plastics manufacturers and ranchers to delay proceedings so the new leadership could review the cases — and judges almost always said yes. The Third Circuit recognized Guaido’s representatives as speaking for Venezuela, though noted “there is reason to believe that Guaido’s regime does not have meaningful control over Venezuela or its principal instrumentalities such as PdV.” The government dropped requests for a stay in this case as oral arguments began.

The appellate opinion dealt another setback to the Venezuelan opposition. Guaido declared himself interim president on 23 January, a move recognized by the US and more than 50 western governments that led directly to US sanctions on PdV. Guaido-appointed directors have controlled Citgo since February. But both the Maduro and Guaido governments now face a potential loss of control over its profitable US refining system and the exit of US oil major Chevron as a key bond payment comes due in October.

Crystallex “repeatedly reached out to Venezuela’s interim government to seek a fair settlement that would compensate Crystallex for its property and preserve the value of Citgo for the Venezuelan people,” the company said today.

The company was asked if that offer was extended.

“We look forward to proceeding with the legal process to recover the value of our expropriated investment in Venezuela,” the company said.

turnaround

Heavy supplies shrink for US refiners

Tariff threat narrows US heavy crude options

originally published 31 May, 2019.

President Donald Trump’s threats to impose tariffs on imports from Mexico dealt the latest blow to US heavy crude supply options already narrowing under his administration this year.

Actions against Mexico would join sanctions against Venezuela and Iran and infrastructure constraints from Canada in trimming a key competitive advantage for the most complex US refiners. Trade groups warned the measure could increase US retail fuel prices.

“We thus urge the president not to pursue energy tariffs against one of our most important trading partners,” American Fuel and Petrochemical Manufacturers chief executive Chet Thompson said.

Trump late yesterday said he would impose escalating tariffs beginning at 5pc on “all goods” from Mexico starting 10 June unless the country did more to halt illegal crossings of the US-Mexico border. Tariffs would increase by 5pc each month until a final 25pc in October.

Imports of Mexican heavy crude surged in March, according to the latest Energy Information Administration data. US buyers scrambled to replace heavy, sour supplies from Venezuela, which had been blocked by US sanctions imposed on 28 January on national oil firm PdV. Mexico was the second highest source of 20°API or lower crude after Canada, a role the country’s heavy production has not played for US refiners since 2011. Venezuelan production, the single largest US source of heavy crude from 2003 to 2017, shrank to fifth in March out of seven suppliers.

Mexican heavy was 27pc of all heavy crude imported for the month. Colombian and Brazilian heavy production also showed marked increases in March compared to the same month of 2018.

Refiners privately said 5pc would not be an immediate, severe impediment. But the potential escalation was a concern. Shell, the largest regular US importer of Mexican heavy crude and operator of a 340,000 b/d refinery in Deer Park, Texas, in a joint venture with Mexico’s national oil company, Pemex, could not be immediately reached for comment. Chevron, the second-largest routine importer of Mexican heavy crude, cautioned against US trade measures that could invite a response.

“Chevron supports free and fair trade, and believes the imposition of new tariffs should be balanced against the potential for retaliatory actions that impair the development of new markets,” the oil major said.

Mexico’s slow liberalization of its oil market has made it an attractive investment for oil majors and US independent refiners. Marathon Petroleum has expanded its Arco brand across western Mexico, integrating a wholesale business there with its western US refineries. Valero invested in port and inland infrastructure in central and eastern Mexico, while BP, Chevron, Shell and Total have all expanded retail businesses over the same area.

But it would be difficult for Mexico to spurn such businesses in retaliation. Mexico imported 71pc of its gasoline demand for the first two weeks of May from the US. US diesel satisfied 77pc of demand over the same period.

Mexico has worked to increase its destinations for crude. US was still the main destination of Mexico’s crude exports in April, taking 58pc, or 594,000 b/d. Asia received another 296,000 b/d, or 29pc, and Europe 133,000 b/d, or 13pc.

“Pemex has been sending now an increasing percentage of its production to the Netherlands and some part of Asia,” Mercury Energy Consultants analyst Arturo Carranza said. “This has been part of a long-term strategy to depend less on US purchases.”

US refiners, meanwhile, must continue to hunt for heavy feedstocks as the industry exits an intense maintenance period in the first half of this year. July prices for Western Canadian Select (WCS) — the new king of US coking units — have crept toward discounts supporting costlier railed shipments of the crude.

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.