Energy Business

Phillips 66 Refinery Change Highlights Oil's Woes

Oil refiner Phillips 66 (NYSE: PSX) announced Wednesday that it will convert its San Francisco-area crude oil refinery to produce renewable diesel fuel. Like biodiesel, renewable diesel fuel is made from vegetable oils and animals, most of which are waste products.

Unlike biodiesel, which is made by a process called transesterification that adds oxygen to the fuel, renewable diesel is produced in the same way as petroleum-based diesel. The company says it will construct pre-treatment units and repurpose its existing hydrocracking units to produce renewable diesel fuels. The Wall Street Journal reported that the conversion project is expected to require about $800 million in capital investment.

Phillips 66 plans to produce 800 million gallons (about 19 million barrels) of renewable fuels annually at the plant once it begins operating in 2024. The company will use its existing logistics systems (pipelines and tanker dock) to bring in the oils and fats it will process.

The company also announced plans to shut down its refinery in central California in 2023. The two refineries combine to process about 120,000 barrels of crude oil a day. The Los Angeles refinery (139,000 barrels per day) will remain in operation.

In the U.S., demand for refined petroleum products like gasoline, diesel fuel, and jet fuel is down by more than 100% year over year. Demand for jet fuel last week was slightly less than half the demand for the same week in 2019. The COVID-19 pandemic gets the blame for that.

At the same time, projections for how long it will take the airline industry to recover to pre-pandemic levels range anywhere from two to five years. Demand for gasoline dropped by more than 10% year over year last week and distillate fuel oil (diesel fuel) demand was also down by 10%.

Demand for diesel will be further constrained as electric and hydrogen/electric semis enter the market over the next two or three years.

And it makes sense that California refineries are the first to go. The state’s tight emissions regulations will make it more difficult to earn a profit in the future. Phillips 66 told the WSJ that the San Francisco-area refinery is not currently making money.

Earlier this month, refiner Marathon Petroleum Corp. (NYSE: MPC) announced the “indefinite idling” of two refineries. The Gallup, New Mexico, plant will be permanently closed and the Martinez, California, (near San Francisco) plant may be “strategically repositioned” as a renewable diesel facility. Marathon expects to complete the conversion of its Dickinson, North Dakota, oil refinery to a renewable diesel plant by late this year.

The company’s stock traded up about 0.2% Wednesday afternoon at $64.61 in a 52-week range of $40.04 to $119.92. The price target on the stock is $82.28 and Phillips 66 pays a dividend of $3.60 annually for a yield of 5.62%