WASHINGTON – Three months ago, facing dismal projections for gasoline demand due to the coronavirus pandemic, Phillips 66 announced it was converting an oil refinery outside San Francisco to produce biofuels made from used cooking oil and animal fat.
With the Houston company’s stock price down by half from what it was 10 months earlier, CEO Greg Garland described the project as “a great example of how Phillips 66 is making investments in the energy transition that will create long term value for our shareholders.”
Refiners like Phillips 66 are turning to biofuels and the valuable government credits that come with them to prop up sagging revenues as a surge in the coronavirus cases drives renewed government restrictions and lower demand for gasoline and diesel. Since COVID-19 took hold in the spring, refining companies have announced new biofuel plants and refinery conversions at a steady pace, with close to 20 projects in the planning stages, according to analysis by S&P Global Platts.
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“This is really a turning point for many refiners, who are suffering under harsh financial pressures because of the COVID pandemic,” said Richard Joswick, managing director of oil research at S&P. “The costs of biofuel production are basically driven by the cost of vegetable oil, and right now it’s quite profitable.”
Many of the projects are located on the West Coast, where biofuels producers selling into California or Oregon, can earn around $3.50 a gallon in state and federal credits that can be sold to other refineries to meet federal requirements for blending renewable fuels, such as ethanol. And that’s not counting the price of the biodiesel itself, about $3.30 a gallon in California.
With other states looking at similar low carbon fuel standards, analysts are predicting that by 2025 advanced biofuels production will have nearly double to 5 billion gallons a year, which would amount to 8 percent of current diesel production.
The financial performance of U.S. refiners has fallen off a cliff this year. Phillips 66 expected to report a $3.3 billion loss for 2020, according to estimates by the financial research company Bloomberg. Marathon Petroleum, the largest refining company in the country, is expected to report an $8 billion loss for the year.
Biofuels have helped cushion that blow. While San Antonio-based Valero reported a more than $460 million third quarter loss last month, it would have been worse had it not been for $184 million in operating income from its renewable diesel operations.
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Companies that don’t have advanced biofuel production are reconsidering, as the high cost of buying renewable fuel credits or RINs to meet federal obligations deepens their financial stress. David Lamp, CEO of CVR Energy in Sugar Land and a longtime critic of the government’s renewable fuels mandate, said in a call with analysts in September he was converting some of his oil refining units to renewable diesel at his refineries in Kansas and Oklahoma.
“This is an option that takes away crude processing capability, but on the other hand, can mitigate RINs fairly effectively,” he said.
With industries worldwide moving to cut greenhouse gas emissions to address climate change, advanced biofuels have gained ground in recent years.
In 2020 alone, the production of renewable diesel and jet fuel, along with other advanced biofuels, has grown 44 percent to more than 278 million gallons in September, according to Environmental Protection Agency data.
Driving the growth in part are cost reductions in what remains a fairly new technology in converting waste cooking oils into fuel. With greater attention from industry, chemical catalysts have been improved and inefficiencies in the production process worked out, said Blake Simmons, director of biological systems and engineering at Lawrence Berkeley National Laboratory in California.
“There’s been a flood of funding for research. It was going to have an effect. It was just a matter of when,” he said. “Now you’re seeing these technologies scale up because the cost curves have shifted down. There’s technology maturation.”
With the recent growth, some renewable fuel refineries are even reporting difficulty getting used cooking oil and animal fats, which have relatively low carbon footprints and are more desirable than virgin feedstocks such as soybean oil.
With the coronavirus shuttering many restaurants, cooking oil is getting particularly hard to find, said Michael McAdams, president of the Advanced Biofuels Association, a trade group.
“The feedstock issue is tricky and something we’re going to have to see if we have the ability to scale up,” he said. “The best hope is if we can broaden the feedstocks available.”
To that end, refiners are looking at turning tree trimmings and municipal waste into fuel, providing them with a much larger feedstock that has an even lower carbon footprint than waste cooking oils.
Marathon already has a deal with a Nevada plant that turns municipal waste into a synthetic crude that can be converted into transportation fuel. And the California Department of Forestry and Fire Protection is examining the possibility of setting up mobile “bio refineries” in the woods to process tree trimmings, adding a financial incentive for wildfire management, Simmons said.
“There’s a lot of interest in nations dealing with wildfire risk,” he said.
But for all the recent interest, there are questions whether refiners will stay committed to biofuels once a coronavirus vaccine is distributed and fuel demand presumably returns to normal.
CVR Energy, for instance, is holding out the possibility of converting its new biofuels units back into crude refining units.
Speaking to analysts in September, Lamp, the CEO, said returning the units to oil refining was fairly simple, just requiring the switching out of some chemical catalysts that convert crude and their biologic alternatives into fuel.
“The way we’re viewing it is, it’s an option,” he said. “We don’t want to burn any bridges to go back to refining.”