Andeavor’s petroleum refinery switch-over to renewables, in the heart of Bakken shale: what are the drivers?

News arrived this week from Dickinson, North Dakota that Andeavor is proposing to switch its refinery there over from petroleum refining to the production of renewable diesel.The timing will be 2020, the feedstock is waste and crop-based oils, the capacity will be 12,000 barrels a day (183 million gallons per year), and the technology is Haldor Topsoe’s hydrotreating tech which removes the oxygen from organic oils and converts them to hydrocarbons.

The Pope might have declared himself a Buddhist and that would be a smaller event, compared to a refiner of petroleum — a business unit of Marathon — converting an entire refinery over to renewables. 

Where in the world is Dickinson?

One of the reasons that the event did not lead the coverage this week in major media — and they certainly covered Tesla’s proposed privitization in copious detail — is that probably that most people have never heard of Dickinson, North Dakota. For many people, it seems like an awfully out-of-the-way outpost. 

So let me offer this map and place upon it the small town of Dickinson and something you certainly heard of, which is the massive Bakken Shale play, one of the largest oil developments in the United States in decades. After the Bakken boom came the Bakken bust, but as Bloomberg reports here, the Bakken has been bustling again, though prospects are slightly dimmer than back in the days when the radio airwaves were running ads scouring the region for drivers and operators for crude oil production. Last time I drove through Dickinson, a giant billboard sat outside of town seeking workers for oil shale jobs and all the industries that rose with the Bakken play.

So, that’s where Andeavor is switching over its refinery to renewable fuel. And if you have ever heard the reaction when Bob Dylan “went electric” with a rock-and-roll set at the Newport Folk Festival, you might have a good model for Andeavor’s striking move. Only Nixon could go to China. Only Mandela could make peace in South Africa. Only companies like Andeavor (and its new parent Marathon) can switch petroleum refineries over to renewables. Others can build, but incumbents can switch, and when public companies shift, you know the calculators have been whirring and teams have been burning the midnight renewable oil to ensure that the project pencils out.

U-L-S is A-O-K

It’s the search for ultra-low sulphur diesel, primarily, that’s found at the heart of this. Other issues may be motivating Andeavor — but we know that the world’s marine fleets are switching over to ULS marine diesel in two years, and the world is short on refining capacity. We’ve highlighted Phil Verleger’s prediction that oil prices — not because of a crude oil shortage but because of a refining capacity shortage — could spike as high as $200, here. But you don’t have to go all the way with Verleger to develop concern. Meanwhile, renewable diesel is bereft of sulphur and it comes with a low-carbon profile that means it is liquid gold in any market that has a low carbon fuel standard in place.  As we highlighted here.

Like, ahem. neighboring Canada is planning to deploy shortly. That Oregon, British Columbia and California already have. 

So, it’s economic opportunity rather than do-goodness that is driving Andeavor — the regulatory regime is in place to support companies that want to do well by doing good, and Andeavor has done its homework. Meanwhile, eastern North Dakota is replete with soybeans and sunflowers. As many know, the world can use just about as much soybean meal as can be produced, primarily for animal feed and especially for China — but there’s never quite enough uses and markets for soybean oil, and this is a primary driver of the biodiesel and renewable diesel industries.

The Ho-Hum

Sometimes, the human race is defined not by its understanding of significant events but by the way it overlooks them.

When ENI took its Venice (Italy) petroleum refinery and converted it to a biorefinery for the production of renewable diesel a few years back, it was remarkable how little the world took notice. 

Then, Alon USA and its then subsidiary AltAir Fuels converted the Paramount (California) oil refinery from petroleum refining to the production of renewable diesel and jet fuel and began supplying, for example, the US Navy with big orders for marine diesel and military JP-8 aviation fuel. At the time there was some attention generated by the Navy for its Great Green Fleet efforts, but there was a lot of criticism over (wacky) perceptions about cost and about whether the US Navy should be an innovator in propulsion at all. There was almost no attention paid to the switch-over of the Alon refinery, even when it was sold to World Energy, primarily known as a biodiesel producer.

What’s next?

More demand for low-sulphur diesel refining capacity, that’s what. The crunch won’t last forever — the world will respond to the ULS marine switch-over by finding an equilibrium. But for now there’s a rush for large capacity diesel projects — and in the renewables sector, that’s the opportunity of a lifetime. And refineries that can produce hydrocarbon diesel from renewable feedstocks can generally produce jet fuel — and jet fuel at affordable prices that come from large scale refining — the world can use a lot of that, too.

There are other ways to produce low-sulphur diesel and ships can install (though expensively and not simply) scrubbers to remove sulphur from the fuel before it combusts. So, opportunity does not equate to victory, but opportunity it is. And Andeavor’s move sums up that sharp operators who have looked at the forward demand picture are seeing the kind of returns that energy investors demand. 

Hydrocarbon diesel from renewables. Affordable, available, at scale. As they used to say in the Virginia Slims ads of many years ago, “You’ve come a long ways, baby.”