25/02/18
Early RD investment helps refiners weather uncertainty
Houston, 18 February (Argus) — Major conventional refiners are confident their
early investment in renewable diesel will help ease their transition from the
long-running biofuel blenders' credit to a new producers' credit, given the
lower value they can capitalize on and potential objectives of the new US
administration. These major refiners — including Chevron, Valero, Phillips 66,
and Marathon Petroleum — have greater access to capital than smaller producers
and have shown they can scale even in an uncertain policy environment. They are
focusing on lower carbon intensity feedstocks that will garner greater
incentives this year. At the same time, the industry has gradually shifted from
a focus on biodiesel to renewable diesel. Renewable diesel generates more value
from federal Renewable Identification Number (RIN) credits, is made more often
from lower carbon intensity feedstocks like beef tallow and used cooking oil,
and can be blended or substituted at higher rates than biodiesel. Refinery
tooling needed for the production of renewable diesel is also much closer to
that of a conventional crude-oil fed refinery, meaning that refiners looking to
repurpose refining assets have an easier path to entering the renewable fuels
space. As a result, major refiners across the industry have invested more
heavily in renewable diesel in recent years. Marathon Petroleum chief commercial
officer Rick Hessling alluded to policy uncertainty on an earnings call this
month but said the company's 48,000 b/d California renewable diesel facility was
well prepared to weather the storm. "We will control what we can control, and
from a feedstock optimization perspective, we're procuring advantaged feedstocks
with low [carbon intensities] and then placing them, as you would certainly
expect us to, in the highest-margin market as possible," he said. Underscoring
the advantage renewable diesel has over biodiesel, Chevron — after idling
multiple biodiesel plants last year — also announced the final commissioning of
the renewable diesel expansion at its Geismar, Louisiana, facility this month.
The transition from biodiesel to renewable diesel within its portfolio opens up
greater opportunities for monetization of the new biofuel producers' credit,
also known as 45Z, since the facility has greater access to lower-carbon
feedstocks than its landlocked biodiesel plants. In general, biodiesel
facilities rely more on local vegetable oils for feedstock, which are
disadvantaged under the new 45Z credit's larger subsidies for lower-carbon
fuels. Over the last six months, biodiesel production facilities owned by Delek,
Hero BX, and Renewable Biofuels have idled production or entered prolonged
maintenance in the wake of credit uncertainty, according to latest Argus
estimates. Especially given lower 45Z credit values this year, these producers
have to rely on the generation and monetization of RIN credits to balance the
costs of feedstock inputs. When policy shifts like tariffs and limits on the use
of certain feedstocks disconnect RIN values from feedstock costs, it can add
even greater headwinds that only larger, well-positioned producers can handle.
Given President Donald Trump's objectives within the energy space, the 45Z tax
credit,under the Inflation Reduction Act (IRA), and other biofuel policy
incentives exist in somewhat of a contradiction. Trump has made clear he wants
to scale back distribution of IRA funds and has gone as far as calling
investment in decarbonization "wasteful" and "a scam." But his support base and
platform favor major oil refiners in their quest to maximize output and profit
in the name of energy security and job creation. The 45Z credit, which adds a
protectionist spin to renewable fuel production by cutting off eligibility for
imported fuels, would seem to align with Trump's focus on energy dominance.
Major oil and gas companies expanding renewable fuel production and increasingly
outcompeting smaller and foreign rivals only add to that narrative. By Matthew
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