U.S. Oil Refiners Accelerate Shift to Renewables in Downturn

Source: By Rebecca Elliott, Wall Street Journal • Posted: Thursday, August 13, 2020

Phillips 66 shift to biofuels at San Francisco-area oil refinery is industry’s latest re-evaluation in light of Covid-19 and tightening environmental regulations

Phillips 66 plans to convert its San Francisco-area oil refinery to a plant largely producing renewable diesel. Photo: Phillips 66

U.S. fuel makers see economic opportunity in getting greener as consumption remains depressed during the coronavirus pandemic and the prospect of more government regulations increases.

Phillips 66 PSX -1.12% said it is planning to transform a San Francisco-area oil refinery into a plant that produces fuels from products such as vegetable oil and animal fat, which generate less soot and fewer greenhouse gases.

The conversion, slated for completion in 2024, is expected to require around $800 million in capital investment and is one of several similar projects proposed in recent months, as U.S. refiners re-evaluate their businesses in light of Covid-19 and tightening environmental regulations.

The coronavirus pandemic has crushed demand for fuels such as gasoline and jet fuel, and many expect global oil consumption to remain depressed for years. But appetite for so-called renewable fuel is poised to grow because of government regulations in places such as California that are designed to reduce greenhouse gas emissions.

“The economic conditions are ripe for it,” Bob Herman, Phillips 66’s refining chief, said of the refinery conversion. He added that the company’s San Francisco-area facility isn’t making money as a traditional refinery.

Phillips 66’s converted facility would largely produce a biofuel known as renewable diesel that is interchangeable with conventional diesel. Other types of biofuels, such as biodiesel and ethanol, must be blended with conventional refined products.

Renewable diesel generally isn’t economical to produce without government incentives, and demand is small, said John Auers, an executive vice president at consulting firm Turner, Mason & Co. The fuel makes up around 1% of U.S. diesel consumption, largely driven by fuel regulations in California. The state aims by 2030 to reduce the carbon intensity of its transportation fuels by 20% compared with 2010 levels.

As California’s rules become stricter and other states consider adopting similar rules, U.S. renewable-diesel consumption is projected to roughly double over the next decade to around 1.1 billion gallons a year, according to Turner Mason.

Mr. Herman said over the next decade, as California’s fuel standards ramp up, the need for renewable fuels would become onerous if Phillips 66 weren’t producing its own biofuel and instead had to buy credits.

Other fuel makers including Marathon Petroleum Corp. MPC -0.55% and a smaller rival, HollyFrontier Corp., HFC -4.85% see similar opportunities. Marathon said last week it is considering converting a California refinery it closed this spring to a renewable-diesel facility. HollyFrontier said in June it plans to close a Wyoming refinery and transition it to renewable-diesel production, as well as build additional capacity in New Mexico to process the materials used in renewable diesel.

HollyFrontier Chief Executive Michael Jennings attributed the decision to convert the Wyoming refinery in part to reduced margins on traditional oil refining because of the pandemic.

“Demand for renewable diesel as well as other low-carbon fuels is growing and taking market share, based on both consumer preference and support from substantial federal and state government incentive programs,” Mr. Jennings said in a recent call with investors.

Exxon Mobil Corp., XOM -1.37% meanwhile, said this week it had signed a deal to buy 2.5 million barrels, or around 100 million gallons, of renewable diesel a year for five years from a California facility that is being converted from a traditional oil refinery.

Renewable diesel typically generates less soot than its petroleum-based counterpart and less than 40% of the greenhouse-gas emissions per unit of energy, measuring from production through consumption, said Robert McCormick, a senior research fellow with the National Renewable Energy Laboratory.

“They’re not getting to transportation decarbonization yet, but they’re taking a really massive step in that direction,” Mr. McCormick said, referring to a zero carbon-emissions scenario.

Phillips 66’s plant would produce around 800 million gallons a year of fuels derived from cooking oil, grease or other byproducts, making it one of the world’s largest renewable fuel plants announced to-date. The fuel maker plans to continue operating the facility as a traditional refinery while it pursues the conversion.

Phillips 66 and a partner called off plans earlier this year to build a renewable-diesel plant in Washington state, but Mr. Herman said he expects a smoother permitting process for this project because Phillips 66 is converting an existing facility rather than constructing a new one.

 

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