California jet fuel decarbonization hits turbulence

Houston, 5 April (Argus) — Airports have joined airlines in asking California to throttle back plans to require lower-carbon jet fuel in the state.

California Air Resources Board (CARB) staff proposed requiring jet fuel used on intrastate flights to meet carbon intensity reduction targets under the state’s Low Carbon Fuel Standard (LCFS) as part of a rulemaking proposal published in December. But experts, including proponents of renewable jet fuel, warn airport infrastructure would not allowtracking fuel blends by flight.

“It’s not possible,” said Kristi Moriarty, a senior engineer for the Center for Integrated Mobility Sciences at the National Renewable Energy Laboratory. “For California airports, you have to do an accounting exercise.”

LCFS programs require yearly reductions to transportation fuel carbon intensity. Higher-carbon fuels that exceed these annual limits incur deficits that suppliers must offset with credits generated from the distribution to the market of approved, lower-carbon alternatives.

CARB considered setting standards for jet fuel before exempting the fuel from obligations in a 2019 rulemaking. Staff renewed the idea for this rulemaking for fuel burned in flights between California airports beginning in 2028. Inclusion would help meet state goals to satisfy up to 80pc of aviation fuel demand with renewable liquid jet fuel by 2045, staff said.

Some fuel producers encouraged regulators to impose the standards even faster to help make renewable synthetic aviation fuel (SAF) more competitive with renewable diesel and hydrogen.

“The slow uptake of SAF in California can be traced, in part, to state regulatory rules, including the lack of an obligation on fossil jet fuel under the LCFS,” a coalition including Darling, Green Plains and LanzaJet told the board.

Airline trade groups have repeatedly warned that approach would land in court. The Federal Aviation Administration (FAA) governs US jet fuel specifications, preempting even the US Environmental Protection Agency. FAA in turn sets its standards by specifications determined by engine manufacturers. Current regulations allow 10-50pc blends of renewable synthetics to produce finished, on-specification jet fuel.

Comments focused less on whether the plan was physically possible. Airports, like many retail gasoline stations, receive bulk, on-specification fuel blended upstream in the supply chain for just-in-time delivery. Fueling infrastructure may sit on airport land, but it is run separately from other airport operations.

“I am not aware of any airports in North America, or even in the world, that are currently receiving and doing on-site blending of SAF,” San Francisco International Airport sustainability and environmental policy director Erin Cooke said.

Special, one-off flights could receive boutique blends delivered to specific planes. But at scale, SAF blended to specification upstream mingles with the rest of the airports fuel for delivery as needed. The alternative would require additional tanks, testing and time that schedule-crunched flights do not have, Cooke said. Representatives for county airports warned regulators that they could not afford such investments.

“Implementing this proposal could impose substantial operational burdens on county airports, potentially disrupting the progress toward our state’s sustainable aviation future,” the California State Association of Counties warned CARB.

CARB did not address questions this week on how regulators saw the plan working.

San Francisco International did not take a position on the current proposal. The airport would welcome tools to better track and understand rising SAF use, she said.

“But in terms of actually tracking the direct fuel and its uplift to an aircraft serving a domestic or California market — I honestly do not know how you would do that,” Cooke said.

Regulators could address that by allowing the use of book-and-claim to shed more light, indirectly, on the volumes of fuels that individual customers bring into the overall system, Cooke said. It’s a system that World Energy, a supplier of renewable jet fuel to Los Angeles International Airport, would prefer, president Scott Lewis said.

“We do not want to get between CARB and our customers, because I think that it runs the risk of being confusing,” Lewis said. “I am just concerned about losing the plot.”

Book-and-claim allows detailed accounting for the purchase and transfer of renewable fuels by parties that may not ultimately receive the molecules they acquired. It aligns with a system of offering closely-tracked carbon reductions for airlines or for their customers — major corporations that might include air travel in their overall carbon footprint goals, Lewis said.

“We need to show that the customers that are acquiring these are getting something for it, and they are willing to pay for it,” Lewis said. “Airlines don’t consume fuel for themselves, they consume it to fly planes with people in the seats.”

By Elliott Blackburn

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

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.

Flooding bottles up US ethanol

read this at ArgusMedia.com.

Floodwaters in the US midcontinent have bottled up the country’s largest ethanol producing region, trimming production as plants wait for railroad repairs.

Devastating flooding in a key corridor along the Nebraska and Iowa border over the past week shut down rail routes and forced some ethanol plants to curtail production. The transportation outage has left some fuel blenders considering alternate sources of octane despite record US ethanol stockpiles.

“There is no doubt that production and transportation is being affected,” Iowa Renewable Fuels Association executive director Monte Shaw said.

An intense weather system last week dropped snow and then heavy rain through the northern plains, flooding the Missouri river along the Iowa, Nebraska and Missouri borders. River levels reached two feet above moderate flood stages in Omaha, Nebraska, on 17 March, and approached 30 feet, or within two feet of record levels, at St Joseph, Missouri, according to the National Weather Service.

Waters submerged or washed out miles of BNSF and Union Pacific track. Both railroads embargoed movements to certain destinations beginning late last week in Iowa, Nebraska and Missouri as routes became impassable. The number of BNSF ethanol rail cars that have not moved in at least 48 hours soared last week to more than 860 cars, according to the Surface Transportation Board — almost ten times the number of idle cars for the same week last year. The railroad reported routes connecting into Sioux City, Iowa, and to Omaha and Lincoln, Nebraska, as out of service as of yesterday. Union Pacific, which had fewer than 100 ethanol cars not moving for more than 48 hours over the same period, reported rail lines out of service in eastern Nebraska and as under observation between Illinois and Kansas across Missouri.

Flood warnings remain in place into next week for southwest Iowa and eastern Nebraska. The states combine for 40pc of installed US ethanol capacity.

Nebraska plants had not suffered flood damage, state ethanol board chairman Jan tenBensel told Argus. But the logistical constraint had cut production as plants deal with slower shipments to market, and raised concerns about delivering grain to some facilities.

“Most of the plants are going right now at a reduced pace, just waiting for the railroad to get cars to them,” tenBensel said.

Flint Hills Resources confirmed reduced rates at its ethanol plants in the affected area to manage slower rail movements south.

“We continue to operate, even though shipping is a challenge,” spokesman Michael Wilhelmi said.

The company separately confirmed disruptions to deliveries into Texas.

“Flint Hills Resources is adjusting our gasoline production to make up for the loss of ethanol to meet demand,” the company said.

Ethanol last year accounted for more than 10pc of the US gasoline supply, and offers a critical cheap source of oxygenate and octane for finished fuel. Fuel blenders without ethanol would turn to blending premium blendstocks into lower-octane unfinished gasoline, raising potential isolated shortages for premium gasoline.

Texas trade associations confirmed they were not yet seeking state support for federal fuel specification waivers. The Environmental Protection Agency did not comment on whether it received any requests for help from other states.

Magellan Midstream Partners and Kinder Morgan were both monitoring supplies but reported adequate inventories for customers.