Falling D4 RIN values alter RD strategy

Soaring US renewable diesel production is cutting renewable fuel credit prices and pressuring biofuel production margins, potentially curbing industry growth.

Renewable diesel (RD) production in North America last year jumped by 36pc to a record 3.45bn USG, and output this year is expected to climb by another 28pc to 4.43bn USG, according to Argus estimates.

Rising production has cut the value of biomass-based diesel D4 credits, or renewable identification numbers (RINs), by 75pc over the past year, as credit generation from renewable diesel production has outpaced the the US Environmental Protection Agency's (EPA) biofuel blending targets.

D4 RINs credits reflect compliance costs of biofuel that has been blended with diesel, used by fuel suppliers in accordance with the EPA's annual Renewable Fuel Standard (RFS) mandates. They also act as an incentive for renewable fuel production, as producers can sell RINs once their biofuels are blended with conventional road fuels. Lower prices on D4 RINs generate less revenue for the biofuels industry and also reduce compliance costs for obligated parties.

Some refiners have shifted their strategic focus to compensate for lower RIN values, with some cutting back on renewable fuels production.

Vertex Energy plans to idle renewable diesel production at its Mobile, Alabama, facility as the company anticipates generating wider margins by returning a converted hydrocracker back to fossil fuel production.Vertex remains open to restarting its renewable diesel production if market conditions improve.

CVR Energy is considering changing feedstocks to improve its renewable diesel margins, possibly substituting corn oil for soybean oil.

Chevron has shared similar sentiments, saying feedstock flexibility can be a major advantage across its operations. The company recently closed two biodiesel facilities in the US midcontinent as attention shifts to more profitable renewable diesel in the long term.

Valero is nearly finished converting its renewable diesel unit to sustainable aviation fuel (SAF) at its Diamond Green Diesel joint venture facility in Port Arthur, Texas. The venture with Darling Ingredients is the largest producer of renewable diesel in North America and a major contributor to the increase in supply over the past two years.

Valero views the D4 RIN market as in persistent oversupply due to the growth of renewable diesel, but the company remains optimistic due to other clean fuels incentives, including state-level low carbon fuel standard (LCFS) programs that provide incentives for reducing the carbon intensity of transportation fuels.

"The long-term outlook of RD is still positive, because you look at the number of LCFS programs that are still being contemplated by legislation this year," Valero executive vice president Gary Simmons said.

More renewable diesel capacity is expected to come online by the end of this year. Marathon Petroleum's Martinez, California, refinery is undergoing a full conversion from conventional petroleum refining to renewable fuels and is currently running at 50pc of capacity. Phillips 66 has taken a similar approach with the conversion of their Rodeo, California, plant, with 30,000 b/d of renewable diesel online.

With EPA biofuel blending targets fixed through 2025, an aggregate decrease in renewable diesel production and subsequent lower generation of D4 RINs could counter the weakened RIN prices that are contributing to the industry's depressed production margins.

By Matthew Cope