Valero sees growing demand for low-carbon fuels and will continue to seek out projects which reduce carbon intensity while delivering financial returns to their shareholders, CEO Joe Gorder said on the company's April 22 first quarter results call.
"We have a clear recognition here that low-carbon fuels are going to be in much greater demand going forward," he said."The interesting thing here from our perspective is that we've been able to come up with low-carbon fuel projects and projects that have enabled us to reduce the carbon intensity of some of our other fuels that have significant returns also," he added.
Valero in March announced it was joining with BlackRock Global Energy & Power Infrastructure fund and Navigator to build a carbon capture and storage pipeline system across the Midwest, which will connect to eight of its 13 ethanol plants and have the capacity to store 5 million mt of CO2 annually.
Valero believes the project will lower the carbon intensity of the ethanol produced from around 70 CI to 40 CI, which carries a premium in California Low Carbon Fuel Standard markets, and expects more markets will develop for low-carbon fuels.
Star of the showValero expects to spend 40% of its $2 billion 2021 capital spending on growth projects, and half of that on renewable diesel growth, the only segment which posted positive earnings in the first quarter.
Valero's renewable diesel segment–a joint venture with Darling Ingredients and named Diamond Green Diesel -- reported record earnings of $203 million in the first quarter as earnings margins rose to $2.75/gal from $2.44/gal in the prior quarter despite rising feedstock costs.
"We believe DGD's advantaged feed slate of used cooking oil, animal fats, and corn oil powered these gains," said Matthew Blair, Tudor Pickering Holt analyst in a research note.
The DGD plant expansion at Valero's St. Charles, Louisiana refinery, known as DGD 2, will use feedstocks with a higher mix of tallow, which has a low carbon intensity, but will also include used cooking oil and distillers corn oil from ethanol plants as feedstock, Valero said.
Renewable diesel sales averaged 867,000 gal/day in the first quarter and is expected to average 1 million gal/day for 2021 due to the start up of DGD 2 in the fourth quarter.
DGD 2 will add 400 million gal/year of renewable diesel by the middle of the fourth quarter in 2021, and will be able to sell 30 million gal/year of renewable naphtha.
DGD 3, located at Valero's Port Arthur, Texas, refinery, is expected to be online in the second half of 2023 and produce 470 million gal/year of renewable diesel, bringing total DGD renewable diesel production to 1.2 million gal/year and renewable naphtha production to 50 million gal/year.
However, Valero's renewable fuel operations are not configured to make sustainable aviation fuel, said Lane Riggs, Valero's president, because it would create a big yield penalty loss.
"In terms of the way we think the most economic way to produce it would require a pretty relatively expensive investment," he said.
Refining hurt by polar vortexValero, the second largest US independent refiner, took a large hit as mid-February's polar vortex on the US Gulf Coast and Midwest cut first quarter systemwide refinery rates to 2.4 million b/d, 414,000 b/d below previous guidance.
The company expects second quarter refinery rates to be around 2.725 million b/d, as coronavirus vaccine rollouts and stimulus checks have pushed gasoline and diesel demand to 93% and 100% of pre-pandemic levels, respectively.
Operations at Valero's ethanol plants were also impacted by the polar vortex, averaging 3.6 million gal/d in the first quarter, down 541,000 gal/d from the fourth quarter of 2020. Second-quarter production is projected to be 4.1 million b/d as gasoline demand rises.
Within its traditional hydrocarbon segment, Valero has parlayed its interest in carbon sequestration and other low-carbon projects into its extensive refining sector.
With its one upgrade project–the Port Arthur, Texas, coker project -- on track for completion in 2023, Valero has shifted focus to refinery operation projects which lower carbon emissions, looking for low capital opportunities in refinery units and infrastructure within the fence lines.
"We focused our efforts on where carbon dioxide is concentrated... Therefore it's easier to sequester it and get it targeted," said Riggs.
"But...ultimately [there] needs to be more certainty and more of a larger framework out there for that kind of investment...and you need a carbon price that's a little bit higher, something more on the order of LCFS prices," he said.
