Analysis: Renewable diesel glut hits US refiner profits, threatens nascent industry

Vertex Energy

13/05/2024 11:00

By Shariq Khan and Nicole Jao
       NEW YORK, May 13 (Reuters) - A rush by U.S. fuel makers
to recalibrate their plants to produce renewable diesel has
created a supply glut for low-emissions biofuels, hammering
profit margins for refiners and threatening to impede a young
industry.
    Turmoil in the biomass-based diesel sector, an umbrella term
for renewable diesel and biodiesel, could become a roadblock to
future investments in biofuels, the U.S. Energy Information
Administration (EIA) said this year. That could potentially
stall the transition away from traditional fossil fuels.
    Some producers of these biofuels have already shuttered
plants this year, and industry participants say more are set to
go out of business before the year's end.
    U.S. renewable diesel production capacity nearly quadrupled
following the coronavirus pandemic from just 791 million gallons
a year in 2021 to 3 billion gallons by 2023, as refiners sought
ways to survive the transition away from their petroleum-based
products.
    Combined with biodiesel, total U.S. output capacity for
biomass-based diesel surpassed 5 billion gallons by 2023.
        Renewable diesel is a complete substitute for diesel,
whereas biodiesel can only be used as a blend, making the former
more attractive for producers. 
    Both compete for the same feedstock - biomass, such as used
cooking oil and vegetable oils - and are more expensive to
produce than petroleum-based diesel, so their demand relies
almost entirely on governmental blending mandates and tax
credits.
    But blending targets for biomass-based diesel, set under the
U.S. Environmental Protection Agency's Renewable Fuel Standards
(RFS) program, generate combined demand of just up to 4.5
billion gallons a year through 2025, according to Scott Irwin, a
professor at the University of Illinois. 
        That is already below existing domestic production,
before factoring in imports. By 2025, Irwin estimates U.S.
renewable diesel and biodiesel output capacity will top 7
billion gallons.
    "The crux of the matter is that market participants
convinced themselves that 'if we build it, the EPA will mandate
it'. That didn't happen," Irwin said.
    The oversupply has cut prices of Renewable Identification
Numbers (RINs) - the credits refiners earn under RFS for
producing or importing biofuels - to the lowest in five years.
D4 RINs tied to biodiesel and renewable diesel  RIN-D4-US  fell
below 40 cents a gallon in February for the first time since
2019.
    They were trading around 44.50 cents a gallon last week,
down from an average of $1.50 from 2021 to 2023.
    
    INDUSTRY RESPONSE 
    Refiners are feeling the pinch across multiple segments of
their renewable fuels businesses. 
    Independent refiner Valero's  VLO.N  renewable diesel
margins in the first quarter fell 21.5% year-on-year to $1.02 a
gallon. 
    Rival HF Sinclair  DINO.N  said lower credit prices swung
its renewables segment to an adjusted loss of $18.6 million
before interest, tax, depreciation and amortization in the first
quarter, from a $3 million profit in the prior year.
    Vertex Energy  VTNR.O  plans to convert its
8,000-barrel-per-day (bpd) renewable diesel facility in Alabama
back to fossil fuels production, citing macroeconomic headwinds
for the biofuel which are likely to persist through next year.
It had begun selling renewable diesel from this plant less than
a year ago.
        Other new plants are running around 50% capacity, said
Zander Capozzola, vice president of renewable fuels at
consultancy AEGIS Hedging.
    U.S. oil major Chevron in March said it had  CVX.N 
mothballed two biodiesel plants, citing unfavorable market
conditions. Biodiesel not only competes with renewable diesel
for feedstock, its production generates fewer RINs, putting it
at an even bigger disadvantage to the boom in renewable diesel.
    Meanwhile, large renewable diesel producers are standing
firm despite the oversupply, betting that they can withstand
lower margins until smaller companies are pushed out of the
industry, Capozzola said.

    ROAD AHEAD
    U.S. refiners are widely expected to turn to other markets
in Canada and Europe for their excess renewable diesel, market
participants said. However, they will face stiff competition
from local producers.
    Canada's Imperial Oil  IMO.TO  is proceeding with plans to
build a 20,000-bpd renewable diesel plant near Edmonton which
will be able to produce the fuel cheaper than it would have cost
them to import from the U.S., the company told Reuters.
    Braya Renewable Fuels, which began making renewable diesel
in February at the Come-by-Chance refinery in Newfoundland and
Labrador, believes operational issues will likely slow down new
supply additions. 
    Braya is producing up to 18,000 bpd of renewable diesel from
its plant and sells it through a marketing partner.
    However, the biggest boost for the U.S. renewable diesel
market will likely come once the Biomass-based Diesel Blender's
Tax Credit (BTC) is replaced by the Clean Fuel Production Tax
Credit (PTC) next year.
    BTC allows importers to claim the same tax credits that
domestic producers get, worsening the domestic oversupply, Irwin
said. Once PTC comes into effect next year, it will
disincetivize imports and at the least, slightly improve the
supply side of the equation. 
        The U.S. imported roughly 900 million gallons of
biodiesel and renewable diesel last year, according to EIA data.
Imports in the first two months this year were around 200
million gallons, and Irwin said they are likely to rise through
the rest of the year as importers squeeze out the last few tax
credits they can get.
    "Things don't look as desperate next year, but before it
gets better, it will certainly get much worse," Irwin said.    
    

 (Reporting by Shariq Khan and Nicole Jao in New York;
additional reporting by Rod Nickel in Winnipeg; Editing by Liz
Hampton and Marguerita Choy)
 ((Shariq.Khan@thomsonreuters.com; Twitter/X: @shariqrtrs;
Office: (646) 261-7893;))