Tesoro makes its move on renewable biocrude

January 21, 2016 |

Tesoro-012216-smMajor refiner advancing on biofuels with Fulcrum BioEnergy, Virent, Ensyn.

In Texas, Tesoro has unveiled its plan to foster the development of biocrude made from renewable biomass, which can be co-processed in its existing refineries, along with traditional crude oil.

And the company has identified three new partners in the process:

Fulcrum BioEnergy, Inc.: Fulcrum plans to supply biocrude produced from municipal solid waste to Tesoro to process as a feedstock at its Martinez, California Refinery. An estimated 800 barrels of biocrude per day will be produced at Fulcrum’s Sierra BioFuels Plant in Reno, Nevada, which is expected to be operational in early 2018.

Virent, Inc.: Tesoro and Virent are working to establish a strategic relationship to support scale-up and commercialization of Virent’s BioForming technology which produces low-carbon, biofuel and chemicals.

Ensyn Corporation: Ensyn has applied for a pathway with the California Air Resources Board to co-process its biocrude, produced from tree residue – called Renewable Fuel Oil – in Tesoro’s California refineries.

You might ask, why, and why now — given that we are in an era of ultra-low crude oil prices?


Converting renewable biomass into biocrude is expected to enable existing refining assets to produce less carbon-intensive fuels at a significantly lower capital and operating cost than competing technologies. This approach could lower Tesoro’s compliance costs with the federal renewable fuel standard and California’s Low Carbon Fuel Standard by generating credits, while producing less carbon-intensive fuels which are fully compatible with the nation’s existing fuel infrastructure as well as current vehicle fleet warranties.

Why now?

Tesoro is in a unique position at the moment. As it happens, although gasoline prices have fallen, they have fallen much less quickly than crude oil prices, and the downstream side of the petroleum business, refining and marketing, is enjoying strong refiner margins.

Crack spreads

As the Energy Information Administration explains:

A crack spread measures the difference between the purchase price of crude oil and the selling price of finished products, such as gasoline and distillate fuel, that a refinery produces from the crude oil.

West Coast crack spreads (and Tesoro has refining operations in California, Washington state and Alaska — overall, six refineries in the Western states with combined capacity of over 875,000 barrels per day) neared $36 per barrel in December.

In 2015, the spreads were:

Q1: $21.99
Q2: $28.07
Q3: $28.76
Q4: $22.58

In this summary from Scotia Howard Weil, West Coast refining margins are at a 5-year high.


“Yes, refining margins are strong, and the balance sheet has a lot of cash, but no one can expect margins to stay there,” Tesoro executive vice-President Cynthia “C.J. Warner told The Digest. “So, this is a time to move carefully, and from the most carefully constructed strategy possible.”

In short, California policy isn’t going to turn back towards fossil fuels, and the US Renewable Fuel Standard is going away any time soon, so the opportunities in low-carbon fuels might be about the closest thing to a sure thing as refiners look to opportunities in this extremely turbulent market.

What about diesel?

Though Tesoro can produce a range of fuels including gasoline and diesel, renewable diesel looks very appetizing. Tesoro could produce some very attractive blends.

As we have been reporting for months in the Digest, these are golden days for renewable diesel in California. Sales at Propel Fuels, for example, have risen by a factor of 9 in the past 18 months. And AltAir is coming on-line with 40 million gallons of new capacity and CEO Bryan Sherbacow noted that “the chasllenges for us are about producing in-spec fuels based on affordable feedstock, at capacity. If we hit our cost targets there are five gallons of demand for every gallon we could supply.”

Retail diesel prices near the Digest’s west coast office in Temecula, California are running at $2.59 per gallon, a 15 percent discount to the local gasoline price, and a 40 percent discount on an energy content basis.

Diesel if greatly helped along by the $1.01 biodiesel and renewable diesel tax credit, per gallon, just now extended through the end of 2016. Plus, RINs via the Renewable Fuel Standard, and also California Low Carbon Fuel Standard waiver credit prices.

“We’ve established relationships such as those with Fulcrum, Virent, and Ensyn, to progress technologies which would enable our existing fuel manufacturing infrastructure to help meet the demand for low-carbon, advanced biofuels. Working with these companies, Tesoro seeks to create shared value that will benefit our communities, consumers and the environment, while allowing us to supply biofuels at a competitive price,” Warner said.

What about jet?

Jet fuels are another area of opportunity, although currently jet fuel is not yet included as a qualifying fuel under the California Low Carbon Fuel Standard. But demand is building, and substantially. United Airlines has an announced investment in Fulcrum and is an offtake partner of AltAir, and we expect them to be unveiling their overall plans in the next 60 days or so. Cathay Pacific has invested in Fulcrum as well. Alaska Airlines is partnered up with Gevo, and Southwest Airlines has been actively working its offtake partnership with Joule Unlimited. Just to mention a few of the many airlines who are strongly pushing for advanced, cost-competitive,drop-in biofuels that do not compete with food production.

Tesoro in the background as major news unfolds

As the Great Green Fleet sailed into the Pacific yesterday, launching a long-awaited era of renewable military fuels and diversified energy supply and conservation for the US Navy, AltAir Fuels was justly in the limelight as the provider of 77 million gallons of in-spec renewable fuel blends.

But given that AltAir’s bid was limited by its own production capacity to a 10% biofuels blend — you might wonder who the partner was for the other 90%, which is traditional fossil-based diesel. That would be Tesoro, and AltAir CEO Bryan Sherbacow has been pointed in his praise of Tesoro, noting that the economics and logistics of the Great Green Fleet’s debut were not exactly a no-brainer.

Where might you see cost-competitive renewable diesel?

Tesoro’s retail-marketing system includes over 2,200 retail stations under the ARCO, Shell, Exxon, Mobil, USA Gasoline and Tesoro brands.

The Bottom Line

It’s a funny thing, the market.

Many assumed that high oil prices would shift attention towards renewable fuels. In fact, it shifted oil companies towards natural gas (for arbitrage opportunities), toward tight oil (for new production sources), shifted consumers towards fuel-efficient hybrids and electric cars. Even among investors in renewables, interest soared for high-margin chemicals rather than fuels.

Conversely, many assume that low oil prices would kill off advanced renewable fuels. In fact, it’s shifted some refiners to use a time of strong margins to look for reliable opportunities in biocrude. It’s killed off a lot of investment in tight oil extraction and choked off the natural gas boom. Renewable chemicals have strong opportunities, but more selectively than before. And electric cars are very hard pressed to compete on the economics of diesel.

So, here comes renewable fuels — not all of them, surely. Not every technology is a winner when prices go low. But for those who can compete — and for those who can take advantage of the “floor price” support that public policy always aimed to provide at a time when fossil fuel prices go through the floor — 2016 could be a Renaissance Year.

We differ from the oil price collapse of the 1980s and 1990s in one important aspect. Policies like the Renewable Fuel Standard and the Low Carbon Fuel Standard arrived. If they offered little effective support in the case of high oil prices, perhaps that can be understood in the context of legislators’ desire to diversify beyond petroleum, not pick a winner in renewable fuel. But had there not been an RFS or an LCFS, the floor price for renewables would have collapsed along with every other fuel — and we would have been back to dependency on the single source, petroleum, from the lowest-cost providers — not always friendly regimes, and definitely offshore.

The old OPEC playbook of collapsing oil prices to kill off the competition, and raise them again when the monopoly is re-established? It’s struggling worldwide. But also, for once, struggling in the US. lawmakers may well have learned a lesson, and got it right. And here we are with the US Navy enjoying $2.05 per gallon renewable fuel — 33% less than they paid for fossil fuels just over 2 years ago.

Good times may not last long, but for some they have arrived. We’ll see which companies have the well-crafted strategy to negotiate the low oil-price landscape.

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