Back to top

Image: Bigstock

Refineries Convert to Biodiesel Plants: Is it a Survival Plan?

Read MoreHide Full Article

The energy industry is shifting its dynamics amid the current market volatility. This is evident from the current transition pattern witnessed across western United States. Conversion of several crude oil refineries into renewable fuel plants is in the cards. This might provide an impetus to the companies that are presently struggling in the coronavirus-affected market.

Low Demand Closing Plants

The demand for fuels has plunged due to coronavirus-induced lockdowns around the globe. Travel bans have significantly eroded the demand for gasoline and jet fuels. To navigate through the downturn, several refining companies have reduced run rates at their facilities. Some are even closing their plants permanently and letting go of excess capacity due to lower margins. Last week, Royal Dutch Shell plc (RDS.A - Free Report) reportedly said that it plans to permanently close an oil refinery in Philippines. U.S. refining major Marathon Petroleum Corporation (MPC - Free Report) is also planning to close two crude oil refining plants located in California and New Mexico for low fuel demand.

Survival Through Transformation

Some companies have chosen the path of survival through transformation. Recently, Phillips 66 (PSX - Free Report) stated that it intends to convert a refinery in California into a biofuel facility. The Rodeo Renewed project of Phillips 66 is expected to become one of the world’s largest biodiesel facilities that will utilize used cooking oil, fats, soybean oils and greases as inputs. The project will be developed in compliance with the stringent fuel standards in California. Marathon Petroleum, a Zacks Rank #3 (Hold) company, is also evaluating the future of a refinery in the state for the production of biodiesels. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Texas-based HollyFrontier Corporation (HFC - Free Report) stated in early-June that it will convert a crude oil refinery in Cheyenne, WY into a renewable diesel facility to benefit from the growing demand for alternative fuel. With environmental groups pushing for lower emissions and several government bodies introducing stricter fuel standards, the demand for renewable fuel is expected to rapidly increase in the coming days. Last week, Exxon Mobil Corporation (XOM - Free Report) made a deal with Global Clean Energy to buy 2.5 million barrels of renewable diesel per annum starting from 2022. The deal spans five years. The usage of renewable diesel is expected to decrease greenhouse gas emissions.

Commodity Demand

Biodiesel consumption rose in the country from 10 million gallons in 2001 to more than 2 billion gallons in 2016, per U.S. Energy Information Administration. Although the tariffs on low-cost biodiesel imports have reduced consumption from 2017 through 2019, things are likely to improve as domestic production is increasing at a fast pace. A strong market is required to sell the growing production of the commodity. Notably, California is its biggest consumer. California’s Low Carbon Fuel Standard provides economic benefits for using biodiesel. The demand for the commodity is also expected to increase in other countries with the easing of lockdowns.

However, is there enough market demand for renewable diesel that can justify so many refinery conversions? This remains a concern. Moreover, existing players like Valero Energy Corporation (VLO - Free Report) , Renewable Energy Group and others with significant renewable diesel production capacity have captured the majority of the feedstock. This leaves little room for newcomers in the domain, per Bloomberg. As such, only time will tell whether the new entrants in the market will be able to survive in the long term.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

See the pot trades we're targeting>>