Published on Tuesday, October 26 2021
Authors : Robert Auers and John Auers

Part 2 – U.S. Independent Refiners 

In the first installment of our blog series on how the oil industry is responding to pressures pushing them to become “greener,” we profiled the various strategies being employed by International Oil Companies (IOC’s).  In today’s blog, we shift our focus to U.S.-based independent refiners.  These companies operate in both defined segments and geographic regions and, as a result their Energy Transition challenges and strategies, are more focused than those of the IOC’s.  Specifically, they are targeted to respond to the regulatory initiatives U.S. federal and state governments are imposing on downstream markets.  So far, this has primarily involved increasing production of alternative fuels, with renewable diesel (RD) projects leading the way.  Much of the planned production of RD is being incentivized by the ever more demanding Low Carbon Fuel Standards (LCFS) in California.   Of course, each individual company operates in different regions and has assets with varying levels of processing capabilities, and they also have very different overall corporate philosophies and strategies.  We’ll discuss how this translates into their Energy Transition game plans in Part 2 of this blog series. 

The “Big Boys” – P66, Valero and Marathon  

The three largest independent refiners, P66, Valero and Marathon, all have a diverse geographic footprint and significant variations in processing capabilities.  They have all increased their investment levels in Energy Transition driven projects significantly, and although there are some major similarities in those investments (particularly in regards to expanding RD production), there are also noticeable differences in how each of the three are proceeding with those investments. 

Phillips 66 has certainly been aggressive in its move toward expanding investments in alternative fuel production, while at the same time selectively trimming their traditional refining operations. The most high-profile of these moves is the conversion of their Rodeo, CA refinery to a RD production facility.  They began producing about 8,000 BPD (~120 MMGPY) of RD earlier in 2021 alongside their traditional operations (presumably using the smaller of their two hydrocrackers in the RD operation) but are planning on completely discontinuing petroleum refining operations at the site in 2023.  Following this, they expect to begin producing an additional ~44,000 BPD (680 MMGPY) of RD beginning in 2024. 

In another move to reduce the size of its refining footprint, Phillips has also put its 255 MBPD Alliance refinery in Belle Chasse, LA, up for sale.   The refinery remains shut down due to damage from Hurricane Ida, but Phillips has reportedly begun taking steps toward repairing the damage and restarting the plant. However, the company appears to be in no rush and expects the repairs to take several months.  In the meantime, a variety of potential buyers have reportedly expressed interest in the site, with some rumored to want to convert it to a crude export terminal, although there are no confirmed offers, and the future of Alliance remains uncertain. 

In addition to expanding RD production, Phillips has been making other investments supporting Energy Transition segments, particularly those supporting the growth of Electric Vehicles (EVs).  Most notable of these is their increasing involvement in the lithium-ion battery market through the production of graphite anodes, a necessary component of those batteries.  The anodes are often produced from “needle coke,” a specialty product produced from certain refinery cokers.  Needle coke is traditionally used in steel production, but is increasingly used in lithium-ion battery anodes.  In order to produce needle coke, a refinery must coke sweet FCC slurry in a specialty process.  

The rapid growth in EVs has led to a corresponding increase in demand for lithium-ion batteries and by extension for needle coke, making its production very profitable for refiners who have needle cokers.  Phillips 66 is one of the world’s largest suppliers of needle coke and has been making investments to further its reach into the lithium-ion battery supply chain.  Most recently, Phillips spent $150 million in August 2021 to acquire a 16% interest in Novonix, an Australian company that processes needle coke into synthetic graphite for lithium-ion batteries.  This follows an agreement that Phillips made in February 2021 with U.K.-based Faradion to work together to develop higher-performing and lower-cost sodium-ion batteries, which could eventually be a cheaper alternative to lithium-ion batteries.  The company also continues R&D activity relating to solid oxide fuel cells, which can be used to directly convert energy in fuel gasses (natural gas, hydrogen, etc.) into electricity at high efficiencies, and organic photovoltaics. 

Valero has also been very proactive in responding to Energy Transition dynamics and was the first and still largest mover into RD among large U.S. refiners via its Diamond Green Diesel JV with Darling Ingredients.  The JV first began producing RD in 2013 at a site co-located with Valero’s St. Charles, LA refinery at a rate of 160 MMGPY (10.5 MBPD).  This site was subsequently expanded to 290 MMGPY (19 MBPD), and a further expansion to 690 MMGPY (45 MBPD) has just recently been completed and is currently in the process of starting up. 

The JV has also begun work on a 470 MMGPY (30.6 MBPD) RD plant to be co-located with Valero’s Port Arthur refinery.  Valero has been similarly aggressive in its investments in the ethanol market and is now the country’s third largest ethanol producer (and by far the largest among refiners) with 1,700 MMGPY (110 MBPD) of ethanol production capacity.  More recently, the company has partnered with Navigator and BlackRock to build a new CO2 pipeline to move captured CO2 from eight of its ethanol plants to a sequestration site in Illinois.  This sequestered CO2 will be eligible for a $50/tonne federal tax credit and will significantly lower the carbon intensity of the ethanol fermentation process, allowing this ethanol to generate additional LCFS credits if it is ultimately blended into California or Oregon gasoline.  Unlike P66, Valero, has not paired these biofuel investments with any reductions in its refining footprint.  In fact, the company continues to pursue a nearly $1 billion 55 MBPD coker expansion at its Port Arthur refinery with completion set for 2023 (deferred from 2022 due to the COVID lockdown impacts).  This expansion will be accompanied by a 102 MBPD expansion of crude unit capacity, adding the ability to process 21 MBPD of high sulfur resid, and decreasing VGO purchases by 47 MBPD. 

The third (and largest by capacity) of the three “major” independent U.S. refiners, Marathon has centered its nonpetroleum investments on RD production, and like P66 has also selectively decreased refining capacity.  Their largest project is the under-construction 730 MMGPY (48 MBPD) RD conversion of its Martinez, CA refinery that was shut down in the spring of 2020.  The plant will begin producing 260 MMGPY (17 MBPD) of RD in 2H 2022 and is expected to reach full capacity by the end of 2023.  Marathon also began producing RD at the former Dickinson, ND refinery in late 2020, with production now fully ramped up to 184 MMGPY (12 MBPD).  Given that these RD production facilities are re-purposing existing refinery equipment, this necessitated the closure of each of these refineries.  Marathon also closed its 23 MBPD Gallup refinery in the spring of 2020.  Finally, Marathon is part of a JV with The Andersons that operates four ethanol plants with a total capacity of 475 MMGPY (31 MBPD). 

Other Independent Refiners – HFC, PBF, CVR, CLMT, etc. 

Several smaller U.S. independent refiners, including HollyFrontier (soon to be HF Sinclair), PBF, CVR, and Vertex Energy, also have significant RD plans.  When HollyFrontier completes its acquisition of Sinclair (expected in 2022) they will acquire an operating 150 MMGPY (10 MBPD) RD production facility in Wyoming.  Further, HollyFrontier permanently shut its 54 MBPD Cheyenne, WY refinery last year and is converting the site to produce 200 MMGPY (13 MBPD) of RD, with startup expected in 2022. Finally, HollyFrontier is constructing a new 125 MMGPY (9 MBPD) RD unit at its Artesia refinery, with completion expected in 2022. 

CVR is planning to convert units at both its Wynnewood, OK and Coffeyville, KS refineries to RD production – reducing crude oil processing capacity at both facilities in the process.  The Wynnewood project will be able to produce 100 MMGPY (7 MBPD) and involves the conversion of the hydrocracker to RD production.  CVR was ready to bring the unit down in August and perform the final tie-ins and the catalyst change necessary to complete the project but chose to delay its implementation due to weak RD production margins.  The Coffeyville project remains in the engineering phase and a proposed capacity has not yet been announced. 

PBF, meanwhile, is in the engineering phase for the potential conversion of an idled hydrocracker at its Chalmette, LA refinery to RD production.  The proposed project would produce 300 MMGPY (20 MBPD) of RD and completion would likely occur in 2024 or 2025, if the project proceeds.  

Vertex Energy, historically and primarily a specialty refiner of used motor oil, is acquiring Shell’s 90 MBPD Mobile, AL refinery.  Vertex is planning to convert the hydrocracker at Mobile to RD production, reducing crude oil refining capacity at the site in the process.  Initial RD production is expected in late 2022 and the project is expected to reach its full capacity of 220 MMGPY (14 MBPD) by mid-2023. 

Calumet will soon complete its first entry into the RD market.  The company is in the process of converting the hydrocracker at its Great Falls, MT facility into a 12 MBPD RD unit and is scheduled for completion in May 2022.  The refinery will scale back its conventional crude processing capabilities from 27 MBPD to 13 MBPD when the RD unit is started.  Calumet is currently seeking a partner for its RD operations. 

Delek, for the time being, has expressed limited interest in RD.  The company received pressure from activist investor Carl Icahn earlier in 2021 (who had an interest in the company through CVR’s ownership of Delek shares) to invest more heavily in RD but rebuffed this pressure.  As a result, CVR offloaded its stake in Delek.  Given this action, along with the recent decline in RD margins and improvement in traditional refining margins, the prospect for a newly announced RD project for Delek looks improbable for the time being.  The company does retain a $13.3 million option to purchase a 33% indirect interest in GCE Holdings under-construction 220 MMGPY (14 MBPD) Bakersfield facility set to startup in early 2022.  The project is utilizing equipment from Delek’s (formerly Alon’s) Bakersfield refinery, which GCE recently purchased from Delek.   

Energy Transition dynamics continue to evolve and will impact all segments of the petroleum industry.  These dynamics will be impacted by both governmental and market forces and the challenges and responses of operating companies will vary by segment, geography, asset base, company culture, and a whole host of other factors.  We will continue this blog series over the coming weeks to address the different segments/geographies of the industry and how they are planning to answer the question, “Hey, Hey, What Can I Do”?