Production of California's boutique diesel fell last year to the lowest levels in decades as renewable alternatives gained market share in the state.
In-state output of diesel approved for California roads plunged to the lowest fourth quarter volume on record last year, according to the California Energy Commission (CEC), despite available tax data suggesting higher overall diesel consumption. Refiners meanwhile boosted production of non-California diesel to the highest levels in at least two decades and ramped up exports of fuel oil.
Renewable diesel, an alternative diesel that blends seamlessly with its petroleum-based cousin, rapidly grew its market share in the state transportation pool as the mix of diesel supply flipped, according to the California Air Resources Board (CARB). The shift illustrates how US refiners have adapted asa major market seeks to slash their traditional products.
"When we look at opportunities to produce products where there is going to be growth in the market and they are going to have sustainably high margins, we look to renewable diesel," Valero chief executive Joe Gorder said in October.
CARB crash
California refiners had not since 2003 produced less than an annual average 200,000 b/d of diesel approved for the state's roads, called CARB diesel. The stretch dated back to before California's modern fuel requirements took effect. Average production in 2019 fell by a third from 2018, the largest year-to-year decline on record and more than double a 2009 drop as the state navigated a recession.
But California diesel demand was steady for much of 2019, according to a combination of state and federal data. Taxable gallons recorded by the most recent California Department and Tax and Fee Administration data show a 1.3pc increase, to 204,000 b/d, through the first nine months of the year. While short of the more than 2pc increases in implied demand seen for three consecutive years for the same periods in 2015, 2016 and 2017, the modest increase reversed a decline in 2018.
Fuel prices over the course of the year also cannot fully explain the shift, based on Argus assessments. San Francisco CARB and non-CARB diesel were at parity for almost all of 2019, while the Los Angeles market offered a steady premium for CARB fuel. That premium narrowed over the course of the year to within a 7¢/USG range from the previous year's 9.5¢/USG premium.
Renewable diesel surge
Credit prices to comply with the state's green fuel standard moved more dramatically. Renewable diesel supported by the state's Low Carbon Fuel Standard took steadily larger bites of state fuel demand. The fuel, which blends seamlessly with petroleum diesel and can use existing pipelines and other infrastructure, accounted for 10.2pc of the California diesel pool in 2018. Renewable diesel increased that share by more than 60pc to 17.2pc in the first half of 2019, racing past biodiesel as the lead diesel alternative.
Credit prices over the same period increased the spread between average California renewable diesel credits and conventional diesel penalties by almost a third. That gap has doubled since 2017.
US independent refiners Marathon Petroleum, Phillips 66 and Valero and majors Shell and BP have all planned renewable diesel projects. Oil majors Shell and BP have also planned west coast renewable diesel plants. Independent refiner PBF Energy plans to join a proposed Shell plant at the 155,000 b/d Martinez refinery that PBF plans to buy from the major during the first quarter.
Valero already operates an 18,000 b/d renewable diesel plant in Louisiana that it plans to expand to 44,000 b/d in 2021. California's commitment to the program, along with rising interest in the fuel in Canada, Europe and New York, supported investments in the fuel, Valero senior vice president of alternative fuels Martin Parrish said during a third quarter conference call.
"We think the future demand for renewable diesel just looks very strong," Parrish said.
New focus
But California refiners did not ramp down overall diesel production, according to the CEC. Non-California diesel production climbed above 200,000 b/d for the first time in CEC records, and stayed there through the last three quarters of 2019. Output of non-California diesel consistently surpassed CARB diesel production for the first time since CEC records began in 1999.
Refiners and traders have not discussed where that production flowed, and federal and state data does not give a complete picture of consumption in neighboring states.
State tax records show that Nevada diesel and biodiesel consumption increased by almost 5pc in the first 10 months of 2019 compared to 2018. Both Los Angeles and Utah supply that state. Arizona state fuels information was not available, and federal data offers only an incomplete estimate of higher consumption for 2019.
Federal export data and vessel tracking by analytics firm Vortexa show fairly typical diesel exports from California over 2019. But fuel oil exports loading from California began ramping up beyond year-ago levels in August as diesel exports shrank, according to Vortexa.
By Elliott Blackburn
