Valero Moves further into Low-Carbon Fuels Space to Match Growing Demand

by Janet McGurty (S&P Global Platts) Ethanol carbon sequestration will lower CI; DGD renewable diesel expansion online end 2021; Renewable diesel sales expected to grow -- Valero sees growing demand for low-carbon fuels and will continue to seek out projects which reduce carbon intensity while delivering financial returns to their shareholders, CEO Joe Gorder said on the company's April 22 first quarter results call.

"We have a clear recognition here that low-carbon fuels are going to be in much greater demand going forward," he said.

"The interesting thing here from our perspective is that we've been able to come up with low-carbon fuel projects and projects that have enabled us to reduce the carbon intensity of some of our other fuels that have significant returns also," he added.

Valero in March announced it was joining with BlackRock Global Energy & Power Infrastructure fund and Navigator to build a carbon capture and storage pipeline system across the Midwest, which will connect to eight of its 13 ethanol plants and have the capacity to store 5 million mt of CO2 annually.

Valero believes the project will lower the carbon intensity of the ethanol produced from around 70 CI to 40 CI, which carries a premium in California Low Carbon Fuel Standard markets, and expects more markets will develop for low-carbon fuels.

Valero expects to spend 40% of its $2 billion 2021 capital spending on growth projects, and half of that on renewable diesel growth, the only segment which posted positive earnings in the first quarter.

Valero's renewable diesel segment – a joint venture with Darling Ingredients and named Diamond Green Diesel -- reported record earnings of $203 million in the first quarter as earnings margins rose to $2.75/gal from $2.44/gal in the prior quarter despite rising feedstock costs.

"We believe DGD's advantaged feed slate of used cooking oil, animal fats, and corn oil powered these gains," said Matthew Blair, Tudor Pickering Holt analyst in a research note.

The DGD plant expansion at Valero's St. Charles, Louisiana refinery, known as DGD 2, will use feedstocks with a higher mix of tallow, which has a low carbon intensity, but will also include used cooking oil and distillers corn oil from ethanol plants as feedstock, Valero said.

However, Valero's renewable fuel operations are not configured to make sustainable aviation fuel, said Lane Riggs, Valero's president, because it would create a big yield penalty loss.

Within its traditional hydrocarbon segment, Valero has parlayed its interest in carbon sequestration and other low-carbon projects into its extensive refining sector.

With its one upgrade project – the Port Arthur, Texas, coker project -- on track for completion in 2023, Valero has shifted focus to refinery operation projects which lower carbon emissions, looking for low capital opportunities in refinery units and infrastructure within the fence lines.

"We focused our efforts on where carbon dioxide is concentrated... Therefore it's easier to sequester it and get it targeted," said Riggs.

"But...ultimately [there] needs to be more certainty and more of a larger framework out there for that kind of investment...and you need a carbon price that's a little bit higher, something more on the order of LCFS prices," he said. READ MORE