CVR Energy says Wynnewood renewable diesel unit to be online July 1, discusses Coffeyville plans
Updated: Nov 5, 2020
CVR Energy CEO Dave Lamp discussed a multiphase approach to the oil company's renewable diesel strategy during a third-quarter earnings call Nov. 3.
"Narrower crack spreads, elevated RIN prices and a decline in our investment in Delek impacted our our results for the quarter," Lamp said. The company posted a net loss of $96 million in Q3.
CFO Tracy Jackson said crack spreads are down by roughly 55 percent or by around $10 per barrel in Q3 2020 compared to Q3 2019. She added that CVR Energy's RIN expenses for Q3 2020 were $36 million compared to a $2 million benefit the same quarter last year, with the $38 million swing due to an increase in RIN prices and a reduction of CVR Energy's renewable volume obligations in last year's Q3. Jackson estimated that CVR Energy's total RIN expense in 2020 will be between $110 million and $115 million.
Distillate inventories are elevated, Lamp said, and loss of jet fuel demand is more than half the total demand destruction for transportation fuels. "We need jet fuel demand to recover in order for oil to recover," Lamp said. "Ultimately we will likely need to see additional run cuts and/or permanent refinery shutdowns for crack and crude differentials to improve."
In light of the ongoing challenges, Lamp said preserving CVR Energy's balance sheet remains a key focus for the company. "The board thinks the Wynnewood (Oklahoma) renewable diesel unit and potential acquisition opportunities could offer better returns to shareholders," he said. "We continue to explore opportunities to diversify our business. We have received board approval to complete detailed engineering work and have ordered long-lead equipment for our renewable diesel project at the Wynnewood refinery. We are currently evaluating a multiphase approach to our renewable diesel strategy, with Phase 1 being conversion of the existing hydrocracker at Wynnewood."
Lamp said CVR Energy has submitted the necessary applications for permits and, pending approval, could receive refined soybean oil feedstock in Wynnewood as early as May 2021, with the unit coming online by July 1, 2021. The Wynnewood renewable diesel unit is expected to be scaled at 100 MMgy.
"This would allow us to receive 18 months of the $1 per gallon blenders tax credit through the end of 2022," he said, adding that the company views Phase 1 as providing "optionality" with respect to a signficant financial upside to claiming the tax credit in addition to lucrative LCFS credits in California and D4 RINs under the federal Renewable Fuel Standard. This, Lamp said, will allow the company to "recoup a significant portion of our investment in 18 months," adding that if market conditions change materially, CVR Energy can revert the Wynnewood hydrocracker unit back to petroleum crude oil processing at minimal cost.
The conversion from petroleum to renewable processing, according to Lamp, involves some metallurgy upgrades and "the catalyst is a bit different," he said. "To switch back, it's a matter of changing the catalyst, so it's a 20-day outage." The conditions that will affect whether CVR Energy reverts the unit in Wynnewood back to petroleum processing are whether more states opt into the LCFS game, what RIN prices are, and what happens with the blenders tax credit. "We can jump back and forth fairly quickly and harvest whatever is best to make the most money," Lamp said.
Phase 2 of CVR Energy's renewable diesel strategy, if approved, would be to build a renewable feedstock pretreatment unit in Wynnewood in order to process lower-carbon materials such as animal fats, distillers corn oil and used cooking oil. "We will focus mostly on inedible corn oil," Lamp said.
Finally, upon approval, Phase 3 would involve developing a similar renewable diesel project at CVR Energy's oil refinery in Coffeyville, Kansas, which Lamp said currently has excess hydrogen capacity and an existing high-pressure hydrotreater that could be repurposed for renewable diesel production.
"RINs represent one of the single largest costs for refineries, aside from crude oil," Lamp said. "We were disappointed with EPA's recent blanket denial of 'gap' petitions with little basis. As I've said before, we believe the Tenth Circuit Court got it all wrong when it ruled to vacate three small refinery exemptions."
Lamp said CVR Energy is seeking a review of this ruling by the U.S. Supreme Court, since the company believes it conflicts with national policy and exceeds the Tenth Circuit Court's authority.
"I think in the longer term, the number of announced renewable diesel projects [will lead to] an astounding number of new RINs [being added] to the market," Lamp said. "I'm not sure if anyone has analyzed this much, but this is over [a billion gallons of renewable diesel capacity] announced, and several are starting now." The influx of RINs hitting the market would likely drive RIN prices down, and Lamp said they're starting to see that now in forward RINs selling into 2021, which are lower-priced than today's. "That volume of RINs hitting the market will bring parity between ethanol and renewable diesel RINs," Lamp said. "All RIN prices will trend down."
Consolidated capital spending estimates for all of 2020 are expected to total between $125 million to $135 million, with $15 million to $20 million of that anticipated being spent on the Wynnewood renewable diesel project. Lamp said the total projected cost for Phase 1 of the Wynnewood project is approximately $100 million.