Valero sees favorable refining margins for 2021 as it hikes renewable diesel output

Valero Energy has a favorable outlook for refining margins for the rest of 2021, as more vaccinations roll-out and refinery rationalizations continue, while it looks to quadruple its renewable diesel production over the next few years as low carbon fuel policies continue to expand, CEO Joe Gorder said on the July 29 results call.

"We believe that product demand recovery, coupled with significant refinery rationalization should be supportive of strong refining margins," he said, adding that Valero expected "further closures of uncompetitive refineries, particularly in Europe."

Valero is seeing US demand for gasoline and diesel surpassing 2019 levels, particularly on the US Gulf Coast and Midwest, while jet demand is at 80% of what it was in 2019. Product exports are also rising – reaching 410,000 b/d in June – the highest volume since 2018 as Latin American lockdowns ease and mobility picks up.

Increased crude supply from the OPEC+ is expected to widen the spread for between sweet and medium and heavy sour crude, providing further support for refining margins.

USGC coking margins for Arab Medium are averaging $11.64/b so far in the third quarter, according to S&P Global Platts Analytics margin data. This compares with the $10.28/b average in the second quarter.

Renewable diesel growth on track

Valero's well-established renewables portfolio continues to grow, as more renewable diesel capacity is coming online at the end of this year through its Diamond Green Diesel unit – a joint venture with Darling Ingredients.

The Diamond Green Diesel 2 project at its St. Charles, Louisiana, refinery, expected online in the fourth quarter of 2021, will increase the facility's total capacity to 690 million gal/year of renewable diesel and 30 million gal/year of renewable naphtha. After the start-up, Valero expects renewable diesel sales to average 1 million gal/d by the end of 2021, up from the 923 gal/d in the second quarter.

And with the completion of the 470 million gal/year DGD 3 located at Valero's Port Arthur, Texas, refinery in the first half of 2023, DGD's total annual capacity will be 1.2 billion gal/year of renewable diesel and 50 million gal/year of renewable naphtha.

Ethanol margins fall as production increases

Valero expects to produce less ethanol in the third quarter, down to 3.7 million gal/day from the 4.2 million gal/day in the second quarter as margins trend lower.

"The second quarter was really good," said Martin Parrish, Valero's head of alternative fuels.

"What was happening was that through most of the quarter, inventories just kept drawing," he added, noting that trend began to turn around in June when production picked up and margins weakened.

According to Platts assessments, the ethanol-Brent spread is averaging $21.76/b so far in the third quarter, compared with the $31.85/b in the second. Ethanol production broke the 1 million b/d level in May, averaging 1.014 million b/d for the week ended June 23, most recent Energy Information Administration data showed.

Valero's goal is to bolster the value of its ethanol segment by using carbon sequestration, allowing it take advantage of the 45Q tax credit provided by the federal government for the capture and storage of carbon dioxide and carbon oxide.

"That's worth about 15 cents/gal and getting into [Low Carbon Fuel Standard] markets, that's more like 50 cents/gal gross," said Parrish.

Valero's carbon sequestration project with Black Rock and Navigator to build a carbon capture and storage pipeline across the Midwest to connect with some of its ethanol plants in an effort to reduce carbon intensity is has received strong interest from outside parties during a recent binding open system.

"The project serves to help achieve our goal to lower carbon intensity of our products, while providing solid economic returns," Gorder said.

Valero is also looking at some stand-alone sequestration projects for its more eastern ethanol plants, Gorder said.

RVO expectations pushed back

The renewable volume obligations under the Environmental Protection Agency's Renewable Fuel Standard have yet to be set for 2021, leaving obligated parties like refiners in limbo as to how much renewable fuel they need to blend or how many RINs credits to buy.

After missing the November 2020 deadline, the EPA said it expected to release preliminary mandates in July 2021, which many industry participants feel is unlikely, given the month is almost over.

"They are clearly kicking them out to get past the infrastructure deal," said Valero's Richard Walsh on the call about a key piece of White House legislation currently making its way through Congress.

Given the fact that 2021 is more than half over, Walsh said it is likely the year will be over by the time the EPA gets a rule posted and out for 2021.

"So maybe you are looking at a maybe a combined 2021-2022 rule or both [years] coming out at the same time," he added.

"And I think the other reality is they recognize that they need to set an RVO that's achievable and sustainable," he said.