Valero eyes RD demand outside California

Valero has turned attention to renewable diesel (RD) growth markets in Canada, Oregon and Washington as California sets a "floor" for the petroleum replacement, the independent refiner and major renewable diesel producer said today.

The company has looked north as a saturated California diesel pool weighs on prices for Low Carbon Fuel Standard (LCFS) credits, a key incentive driving the rapid US build out of renewable diesel capacity.

A rulemaking process expected to soon propose changes to the California program next year will ultimately lift those prices, Valero vice president of renewables operations and low carbon fuels Eric Honeyman said during a quarterly earnings call.

Valero would meanwhile shift to newer LCFS markets that could be supplied from joint venture Diamond Green Diesel's roughly 76,000 b/d of renewable diesel capacity along the US Gulf coast, he said.

"That just continues to be kind of the winning formula of being able to have flexibility to go to different markets in the RD space," Honeyman said.

LCFS markets require yearly reductions in transportation fuel carbon intensity. Higher-carbon, conventional fuels that exceed the annual limits incur deficits that suppliers must offset with credits generated from the distribution of approved, lower-carbon alternatives.

California operates the oldest and largest such program in North America. Canada and Washington have begun enforcing their own standards over the past year.

Credit prices in California have fallen over the past two years as a rush of new renewable diesel and other lower-carbon fuels helped supplies of credits quickly outpace new deficits. Tougher targets and other changes expected in the new rulemaking could lift credit prices but may also restrict access for fuels produced from crop-based feedstocks to the market.

Canada's diesel market is roughly the size of California's. But the Clean Fuel Regulation credit market remains opaque as participants ease their way into the program. Valero's 265,000 b/d refinery in St Romuald, Quebec, makes the company an obligated party under the Canadian program.

Pacific Northwest diesel markets are much smaller — Oregon had just a quarter of the petroleum-based and lower-carbon diesel fuel consumption that California reported in the first quarter of this year. Credit prices in both programs began plummeting over the past month after trading at steady premiums to California.

By Elliott Blackburn