Oil Producers Take Notice of Renewable Diesel Margins

Oil Producers Take Notice of Renewable Diesel Margins

CVR Energy reported in May that they had started the process of evaluating the transition of at least one of their refineries to produce renewable diesel.  CEO David Lamp said they had the existing assets and excess hydrogen, which put them in prime position to move into renewable diesel production. Having those assets in place put them at an asset advantage compared to others looking to build from a grassroots level, saving them at least five-fold the capital cost.

Fast forward to August.  CEO Lamp announces the Board of Directors have authorized engineering studies and the preparation of final cost estimates for the project to produce renewable diesel at the Wynnewood refinery. The project will convert an existing hydrocracker to produce renewable diesel and the area includes tanks and a rail terminal as well as a staging facility.  The plant is expected to have between 6,000 b/d and 7,00 b/d of processing capacity and will cost around $100 million. Total capital cost is estimated to be between $1 and $1.20 per gallon of renewable diesel. Renewable diesel production could begin as soon as June 30, 2021.

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CVR intends for the plant to run on soybean oil initially.  According to Lamp, “the main part of this project really is installing the facilities to be able to bring in bean oil and take out renewable diesel to California. So, it’s all rail, tank engine, and loading unloading systems for the most part. There are a couple modifications to the process unit, but not a whole lot. So, that’s why we think we can do it in a year, and we’ll probably have multiple phases of it, just because bean oil is probably the — nets you the worst of CI or the carbon index credits that are available. But it is readily available feedstock, and something you can get your hands on quick, and if it’s washed, and refined, and cleaned up, it’s just that much less complexity you have to do on getting going. And our real strategy’s around the dollar blenders credit which, if you look at it — if we can get 18 months’ worth of 6,000 barrels, that basically pays for the investment, plus some, and gives us optionality. In this case, we were able to run the refinery and process bean oil to renewable diesel, and there’s varying degrees of opportunity cost there, depending on what cracks do. “

CVR isn’t the first Oil company to realize the potential renewable diesel plays in mitigating RIN exposure.  Given the economics of the current marketplace and the margins renewable diesel generate, it is easy to understand the CEO’s excitement.  CVR is stating capital costs of $1 to $1.20 per gallon.  These look really good relative some others that may be looking at $2.50 or more per gallon.

While CVR could look to take advantage of higher margin producing feedstocks like used cooking, tallow, or distillers’ corn oil, CVR is being very precise in their objective.

  1. The have the assets in place.
  2. They have excess hydrogen.
  3. They realize the blenders tax credit (worth $1 per gallon) expires at the end of 2022.
  4. With the refinery up and running by 6/30/21, it gives them 18-months for the BTC to cover their cost on production. After that, their investment is covered.
  5. Product will flow to California where each gallon of RD being made from soybean oil is currently receiving a LCFS credit of nearly $1 per gallon.

It appears that California and its LCFS program has begun to overtake the RFS program as the nation’s primary incentivized renewable fuel program (many might say this happened a year or two back).  Despite being a regional program, the LCFS influence is being felt not only nationwide but across the globe.  With CVR moving forward on plans to begin renewable diesel production, Marathon Petroleum just announced it will indefinitely idle its refineries in Martinez, California, and Gallup, New Mexico, with no plans to restart normal operation.  However, Marathon is evaluating repositioning the Martinez refinery to a renewable diesel facility because it aligns with California’s LCFS objectives and Marathon’s greenhouse gas reduction targets.

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