2021 AFPM Annual Meeting Virtual Edition: Know your renewable diesel exposure
STEVE ROBERTS, Opportune
With renewable diesel production capacity on the rise, refiners must consider business process changes and mitigate exposure risks that may exist beyond the equipment and operating units if they are to unlock full value capture.
As the debate around the consumption of lower full-lifecycle carbon fuels plays a key role toward an energy transition, the fungible characteristics of renewable diesel make it an ideal candidate for moving in this direction. Current renewable diesel production in the U.S. is relatively small compared to petroleum-based diesel, but projects in various stages of completion are set to nearly double production capacity in the next four years (FIG. 1). New approaches and new technologies are converging for conventional refiners to repurpose their facilities to produce renewable diesel to supply growing demand centers, such as those on the U.S. West Coast and Canada, and prospective markets on the East Coast and Midwest.
FIG. 1. Biodiesel and HVO production, U.S., 1990–2025. (Source: IEA)
With projected demand and supply of renewable diesel expected to come online, most refiners will have a new set of challenges and exposures that they will need to assess, understand and mitigate. In the U.S., many layers contribute to the renewable diesel value stack (FIG. 2)., including:
Energy value—The energy density for renewable diesel has only a negligible difference compared to petroleum-based diesel due to the inputs and processing. Therefore, the energy value is considered the same.
- Renewable identification numbers (RINs)—Most refiners are familiar with the RINs process, but they are likely uncomfortable in the role of being a renewable diesel producer or “obligated party,” as defined under the Renewable Fuel Standard (RFS-2). Renewable diesel (non-coproduced) has an RIN equivalence value of 1.7; so, in addition to more valuable D4 RINs, it also produces more RINs per gallon that can be used to cover other RFS obligations. D4 and D6 RIN values have steadily climbed since the beginning of the COVID-19 pandemic in 2020, reaching near all-time highs by the end of February 2021.
- Low-Carbon Fuel Standard (LCFS)—With California, Oregon and British Columbia having already established LCFS or Clean Fuels Programs (CFP), and Washington State and the rest of Canada close behind, there is clear value in a low-carbon intensity (CI) renewable fuel like renewable diesel. Some refiners are already familiar with these markets, but it may be uncharted territory for others.
- Biodiesel Tax Credit (BTC)—The retroactive reinstatement of the BTC has added another $1/gal to the value stack for renewable diesel.
FIG. 2. Layers that contribute to the renewable diesel value stack.
On the cost side, new factors must be considered:
- Feedstocks—For most refiners, feedstocks like soy oil, distiller’s corn oil, waste greases or other feedstocks will likely be perceived as a new commodity to the organization.
- Processing—While some processing units (especially hyrdrotreaters and hydrocrackers) will and can be reconfigured to produce renewable diesel, refiners are adept at adjusting to new parameters for operations.
- Logistics—On the feedstock and product side, logistics operations will likely be challenged. In many cases, both feedstocks and the renewable diesel will be moved by rail and may be unable to co-mingle with petroleum-based feedstocks and products in storage.
- Administration—Depending on the areas above, there are likely new business processes across supply chains, trading, accounting, regulatory and tax to ensure that proper value is captured from renewable diesel production.
In terms of exposure:
- Feedstocks—Refiners new to this market will likely be more exposed to price volatility and supply availability of more agricultural products than ever, and will need to understand feedstocks, the markets and how to effectively meet corporate risk guidelines for feedstock supply and purchases.
- Renewable diesel sales—There are limited renewable diesel market prices available, and organizations must determine where sales will occur, decipher liquid vs. illiquid market and pricing, differentials in market and quality, and how to meet those same corporate risk guidelines to maximize value capture.
- LCFS credits—This begins with the development and approval of a CI pathway and setting the CI number for the fuel. The markets are well established and once a CI pathway is set for a given renewable diesel product, the process should be straightforward for those already familiar with the standards. Differing standards by state and country will require additional understanding and robust processes.
- Business processes—Across the lifecycle of the fuel, new or updated business processes are necessary to support value capture. This includes new tax processes, new suppliers and customers, and new data to track.
Renewable diesel as a drop-in replacement for petroleum-based diesel does not mean it can simply drop into your existing business processes. Several business process and exposure risks exist beyond the equipment and processing changes in operating units. To unlock the full value from rising renewable diesel demand, each area within your organization must understand the new business end to end.
Opportune LLP is an energy-focused business advisory firm with deep experience in commodity risk management, business process transformation, digital transformation and supply chain management. Our professionals have consistently delivered high-value projects to clients across the energy value chain.
About the author:
STEVE ROBERTS is a Director in Opportune LLP’s Process and Technology practice. He has more than 20 years of experience consulting in the energy industry, providing clients with trading and risk management process and system implementation, supply chain optimization, asset acquisition integration and business analytics. Prior to joining Opportune, Roberts worked at Andersen Consulting and Accenture in the energy practice. Throughout his career, he has worked with integrated supermajor oil companies, midstream energy companies, merchant refiners and global banks. Roberts holds a BS degree in chemical engineering from Texas A&M University. He can be reached at email@example.com.