US Fuel-Makers Could Face 'Irreparable' Damage from Demand Collapse and the Move to Green Policy

August 19, 2020

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by Josh Siegel (Washington Examiner) ... “Thankfully, I am not invested in refineries,” said Tom Kloza, global head of energy analysis at IHS Markit and founder of Oil Price Information Service. “They are having a pretty miserable year. They don't have a marquee hydrocarbon making a reasonable return right now.”

President Trump and Republican policymakers have spent significant political capital during the coronavirus pandemic tending to the wounds of shale oil producers, but refiners that transform the crude into fuels for consumers are facing immediate risks and long-term worries. The refining industry has a strong presence in swing states such as Pennsylvania and Ohio, whereas the shale industry is dominant in red states.

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At the worst point of the pandemic, with little demand for their fuel, refineries operated at about 30% lower capacity than what they usually do, and some shut down operations completely.

Refineries are now operating at 81% utilization, according to the Energy Information Administration, but that’s still less than 95% from a year ago, and many are struggling financially or operationally.

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Some refiners are preparing for a more uncertain future as consumption of traditional oil-based fuels lags and the potential for more environmental regulations looms.

Phillips 66 plans to convert a San Francisco-area oil refinery into the “world’s largest” renewable fuels plant, the company announced Wednesday.

Phillips 66 is transforming its Rodeo refinery into Rodeo Renewed, reconfiguring the facility to produce 800 million gallons per year of renewable diesel, renewable gasoline, and sustainable jet fuel using cooking oils, fats, greases, and soybean oils.

The company cited California’s low-carbon fuel standard, which aims to cut emissions and reduce petroleum in transportation fuels, as a reason for the change.

Marathon, the largest U.S. fuel-maker, HollyFrontier Corp, and CVR Energy also have begun or have pledged similar conversions to renewable production.

Morgan said those transitions show the flexibility of U.S. refiners, which are distinguished globally because of their ability to handle different types of crude, but he noted that renewable fuels are more expensive to produce and require less manpower.

Marathon acknowledged job losses from its decision to idle two refineries, which includes a commitment to evaluate converting one of them, in California, to produce renewable diesel.

“There is certainly a need for renewable fuels given existing regulatory programs, so you are seeing a move to produce fuels needed to comply,” Morgan said.

But the industry so far has faced mostly state and local regulatory threats, including an effort by northeast states to create a regionwide cap-and-trade program for transportation fuels this year.

That could change in a Joe Biden administration. The presumptive Democratic presidential nominee has promised strengthening fuel-efficiency standards that Trump weakened, along with pledging major investments into electric vehicles. The Biden campaign has also called for stricter airline greenhouse gas emissions rules.

“Now is not the time to double and triple down on environmental mandates when the refining industry is struggling,” Morgan said.

Morgan is hopeful Biden would listen to refining industry concerns as president, noting the Democrat's past support for refineries operating in and around his home state of Delaware.

He said that the lobby group, if Biden wins, intends to press him to support legislation reforming the contested Renewable Fuel Standard by replacing the RFS with a “technology-neutral” octane standard. High-octane fuels are more efficient and can withstand more compression before igniting.

“We know you want to move to electric vehicles, but why not make the internal combustion engine fleet more efficient at the same time?” Morgan said. “Biden has historically been fair and wanted to protect those jobs.”

But analysts said the refining industry, like the oil-producing sector, is likely to face bankruptcies and consolidation, as bigger companies are able to transition more easily to alternative fuels. READ MORE

Big oil need not apply: UK raises the bar for UN climate summit sponsorship (Climate Home News)

Oil Industry Frets About Recruiting Its Next Generation of Workers: A growing distaste for the oil business among potential young employees, combined with the economic crisis of the pandemic, could make it harder to tackle competition from renewable energy and electric vehicles (Wall Street Journal)

In the run-up to U.S. election, drilling lobby promotes natural gas as 'clean' (Reuters)

EXXON'S POLITICAL CAPITAL: (Politico's Morning Energy)

Excerpt from Politico's Morning Energy: EXXON'S POLITICAL CAPITAL: A few hours after the close of markets on Monday, the dryly written second paragraph of a technical press release signaled the close of a major chapter in American energy history: "Salesforce.com (NYSE:CRM) will replace Exxon Mobil Corp. (NYSE:XOM) ..." wrote S&P Dow Jones Indices, effectively kicking a titan of the U.S. oil industry off its list of most influential stocks after a nine-decade run. The move leaves Chevron, Exxon's rival, as the only energy company in the index.

It also arguably closes a major door on the era of Big Oil dominance of the U.S. economy, with the company that a decade ago was the most valuable publicly trade company in the world to one has laid off workers and slashed its budget to protect a dividend that some analysts say is the main thing investors find attractive.

Some industry watchers have warned that after previous warnings about the oil industry losing influence, this time it really is different. A decade after the start of an oil boom that put more gas in the industry's tank, Exxon and others have increasingly given up the spirit of exploration in favor of fast and cheap shale plays in West Texas.

BP, Shell and other oil producers have started to flirt with making a transition to more well-rounded "energy" companies; Exxon and Chevron have been content to remain in the oil patch. The index move comes as Exxon has shed an astounding 40 percent of its value so far this year, a decline largely due to the pandemic that's battered energy markets. But the DJIA booting Exxon from its list of market movers only seems to confirm that feeling that the company that once exemplified "Big Oil" has become smaller fry.

Not helping the case that the oil industry is shrinking in stature is that Exxon's downgrade came as a result of Apple's 4-to-1 stock split, which prompted the rebalancing in the index that S&P Dow Jones said brought in companies "that better reflect the American economy." That market defenestration comes even as President Donald Trump has held the industry up as a pillar of American strength despite its poor spreadsheets.

"It's ironic that on the same day Republicans convene to trumpet American energy dominance from surging oil output, Exxon is removed from the Dow Jones," said Jason Bordoff, founding director of the Center on Global Energy Policy at Columbia University. The move "reflects a broad shift in the U.S. economy toward technology but also the recent struggles of the oil sector." READ MORE