CVR Energy Explains Renewable Diesel Outlook

The reduction in refined product demand continued to weigh heavily on crude oil and refined products market during the third quarter 2020. Crude oil differentials have tightened with the decline in crude oil prices and domestic shale oil production.  These differentials are expected to remain week until the shale market recovers.  Oil inventory from wells already complete is expected to continue to decline with West Texas Intermediate (WTI) below $40. In order to incentivize additional production and stem further production declines, WTI will need to rise further.

Refined product exports have returned to pre-COVID levels and gasoline inventories are now within a five-year average. However, distillate inventories remain elevated due to weak jet fuel demand.  The loss of jet fuel demand is more than half of the total demand destruction for transportation fuels as a whole. The pandemic and decimated jet fuel demand has heightened the need within in the oil sector to control costs and manage margins more efficiently.

Marathon Oil, Phillips 66, CVR Energy, and HollyFrontier, among a slew of others, have recognized that in the current environment of reduced distillate demand, renewable diesel production offers both margin protection and an avenue to mitigate a portion of RIN obligation. The beauty of renewable diesel production for oil refiners is that switching from refining hydrocarbons to RD/low carbon is an easy process. To get to renewable diesel production from fossil production, some of the metallurgy in the hydrocracker unit needs to be upgraded and a catalyst change needs to be performed.  At this point, and after receiving regulatory and state approvals, the unit should be able to produce renewable diesel from vegetable oil feedstock.

The ease of changing an underperforming oil asset into a renewable diesel asset has the previously mentioned obligated parties moving rapidly into space.  Marathon Oil is looking at 736 mmgy of production, Phillips 66 is considering 680 mmgy, HollyFrontier is planning on adding two plants amounting to 200 mmgy capacity, and CVR is moving forward on a 100 mmgy plant and is considering converting another 150 mmgy plant to renewable diesel production.

CVR’s game plan in switching assets has three phases.  The first recognizes the need to protect or enhance margins while mitigating RIN exposure.  They have done this with their Wynnewood refinery and have applied for permits while optimizing the refinery.  Phase 1 completion will allow CVR to produce renewable diesel from RBD soybean oil.  It allows the optionality to quickly get into production, the ability to collect the blenders tax credit, California’s LCFS credit, and RINs.

Phase 2 will be the installation of a pretreatment unit at their Wynnewood site.  The unit will allow CVR to process lower carbon intensive feedstocks, like distillers’ corn oil, UCO, and tallow. Phase 3 is continuing to examine the market and make operational changes that align with current market conditions. In this case CVR is looking for board approval to pursue a similar renewable diesel project at their Coffeyville refinery where they have excess hydrogen capacity and an existing high pressure hydrotreater that could be repurposed for renewable diesel production.

Should market dynamics change and fossil fuel production becomes more profitable again, CVR is then still in prime position to switch these assets back to refining fossil fuels.  Making the change back could be accomplished within a 20-day window, requiring not much more than a catalyst change. However, within the current economic dynamic, having Wynnewood producing 100 million gallons of renewable diesel throughput would generate 170 million RINs.  CVR’s current RIN obligation is about 315 million RINs.  Wynnewood renewable diesel production would reduce their RIN exposure by 170 million, and, according to CVR, CVR internally has RIN production of about 20 percent of their total obligation.  Factoring this together, their outstanding RIN obligation after Wynnewood production and internally generated RINs, would be about 80 million.  Adding Coffeyville to RD production, would make CVR a net generator of RINs, and this is not factoring in the impact of LCFS credits or the blenders tax credit.