Crude Summit: US refiners eye strong year, slow change

The US refining industry is set for a strong 2022 and a promising 2023, as the demands of the energy transition are still more of a long-term concern than an existential threat, refining industry veterans said today at the Argus Americas Crude Summit in Houston, Texas.

While industry optimism in 2022 is still tempered by Covid-19's effects on demand, refiners and the energy sector at large should view the pandemic as something of a confidence booster considering how much energy was still required even with much of the world immobilized, said Horace Hobbs, former chief economist for Phillips 66.

"Covid, there are some very bullish learnings from that," Hobbs said. "They shut down the entire world and we still needed 80mn b/d of crude oil."

And while many in the refining industry are touting efforts in green business lines and low-carbon activities, their central businesses of refining petroleum should remain strong for years to come considering the time needed to build out technologies and regulation, Hobbs said.

"If you read the paper, you might think the energy transition is going to happen next week or next month," Hobbs said. "But the math of it is that it is going to be very, very slow."

Conversion concerns

Renewable diesel conversion projects are one of the more popular ways in which refiners are cutting emissions and chasing regulatory incentives. Marathon Petroleum, HollyFrontier, CVR Energy and Calumet are among companies bringing either co-located renewable diesel units or fully converted facilities online this year.

But even that industry, buttressed with generous government incentives, including blender's tax credits and state-level low carbon fuel credits, has structural issues and environmental concerns.

"Beyond going 3-5pc of the [distillate] pool, you start eating into food," Hobbs said, referring to the effect that rising demand for soybean oil and other renewable diesel feedstocks could have on global food supply. "Most people would rather eat than drive, so I think that is an insurmountable headwind."

But the trend of refining conversions is likely to continue, given incentives available to refiners, said Joseph Israel, former chief executive of West coast refiner Par Petroleum.

"There is still a lot [for the industry] to figure out in terms of feedstocks, refinery configuration, mode of operations and marketing channels," Israel said. "But the economics are there to kick off those investments and start construction."

Israel's appearance at the Argus Crude Summit marked his first after departing from Par Petroleum earlier this month. Israel joined the West coast refiner after spending 2011-2014 with Hunt Refining and the previous 11 years with Alon USA, a company later acquired by Delek.

Converging streams

Volatile prices for crude and rising costs for natural gas are two headwinds that independent refiners face in 2022. These factors could lead some companies to acquire upsteam assets and build out retail networks, Hobbs said.

"Integration with crude, retail and commercial markets are going to be more important than ever," said Hobbs. "The idea is going to be to go out and get that quarter of a cent per gallon through logistics and the value chain as opposed to try to get it by burning less gas. You are running out of opportunities to be more efficient."

By Dylan Chase