U.S. fuel-makers continue to suffer from the pandemic-caused demand collapse and are facing an uncertain future as people avoid flying and refiners face the prospect of more strict environmental regulations.
“Thankfully, I am not invested in refineries,” said Tom Kloza, global head of energy analysis at IHS Markit and founder of Oil Price Information Service. “They are having a pretty miserable year. They don’t have a marquee hydrocarbon making a reasonable return right now.”
President Trump and Republican policymakers have spent significant political capital during the coronavirus pandemic tending to the wounds of shale oil producers, but refiners that transform the crude into fuels for consumers are facing immediate risks and long-term worries. The refining industry has a strong presence in swing states such as Pennsylvania and Ohio, whereas the shale industry is dominant in red states.
Consumption of gasoline and diesel has mostly recovered as drivers return to roads with the reopening of economies and trucks, trains, boats, and barges transport products to people staying home.
But global air traffic was still down about 67% in July as travelers avoided being cooped up on planes, the International Energy Agency reported Thursday.
The agency reduced its 2020 oil demand expectations for the first time in three months, citing in large part the continued weakness in jet fuel demand.
“Jet fuel will eventually recover, but it will take a long time to get back anywhere close to the 2019 levels,” Kloza said. “2019 was the last decent year for refiners.”
Jet fuel is a small percentage of the refining industry’s total output, typically at 8%-10% of production. But before the pandemic, it was a source of predictable profits, less cyclical than gasoline demand, which picks up in the summer, and diesel, a big money-maker in the fall and winter.
“Demand still has a major Achilles’s heel in jet fuel, a fuel that typically was the relative constant in the demand column compared to more sensitive but larger supply of gasoline and diesel,” said Frederick Lawrence, an oil industry economist.
At the worst point of the pandemic, with little demand for their fuel, refineries operated at about 30% lower capacity than what they usually do, and some shut down operations completely.
Refineries are now operating at 81% utilization, according to the Energy Information Administration, but that’s still less than 95% from a year ago, and many are struggling financially or operationally.
“We have a little bit of a profit margin now, and we are not losing tens of millions of dollars a day, depending on the facility and where you are,” said a refining industry lobbyist.
Derrick Morgan, senior vice president of federal and regulatory affairs for American Fuel & Petrochemicals Manufacturers, the top U.S. refining industry lobby, has counted five refineries that have permanently closed during the pandemic.
The refinery industry was already wounded last year when the East Coast’s largest and oldest refinery, the Philadelphia Energy Solutions Refining Complex, permanently shut down after a massive fire.
Some refiners are preparing for a more uncertain future as consumption of traditional oil-based fuels lags and the potential for more environmental regulations looms.
Phillips 66 plans to convert a San Francisco-area oil refinery into the “world’s largest” renewable fuels plant, the company announced Wednesday.
Phillips 66 is transforming its Rodeo refinery into Rodeo Renewed, reconfiguring the facility to produce 800 million gallons per year of renewable diesel, renewable gasoline, and sustainable jet fuel using cooking oils, fats, greases, and soybean oils.
The company cited California’s low-carbon fuel standard, which aims to cut emissions and reduce petroleum in transportation fuels, as a reason for the change.
Marathon, the largest U.S. fuel-maker, HollyFrontier Corp, and CVR Energy also have begun or have pledged similar conversions to renewable production.
Morgan said those transitions show the flexibility of U.S. refiners, which are distinguished globally because of their ability to handle different types of crude, but he noted that renewable fuels are more expensive to produce and require less manpower.
Marathon acknowledged job losses from its decision to idle two refineries, which includes a commitment to evaluate converting one of them, in California, to produce renewable diesel.
“There is certainly a need for renewable fuels given existing regulatory programs, so you are seeing a move to produce fuels needed to comply,” Morgan said.
But the industry so far has faced mostly state and local regulatory threats, including an effort by northeast states to create a regionwide cap-and-trade program for transportation fuels this year.
That could change in a Joe Biden administration. The presumptive Democratic presidential nominee has promised strengthening fuel-efficiency standards that Trump weakened, along with pledging major investments into electric vehicles. The Biden campaign has also called for stricter airline greenhouse gas emissions rules.
“Now is not the time to double and triple down on environmental mandates when the refining industry is struggling,” Morgan said.
Morgan is hopeful Biden would listen to refining industry concerns as president, noting the Democrat’s past support for refineries operating in and around his home state of Delaware.
He said that the lobby group, if Biden wins, intends to press him to support legislation reforming the contested Renewable Fuel Standard by replacing the RFS with a “technology-neutral” octane standard. High-octane fuels are more efficient and can withstand more compression before igniting.
“We know you want to move to electric vehicles, but why not make the internal combustion engine fleet more efficient at the same time?” Morgan said. “Biden has historically been fair and wanted to protect those jobs.”
But analysts said the refining industry, like the oil-producing sector, is likely to face bankruptcies and consolidation, as bigger companies are able to transition more easily to alternative fuels.
“The prolonged hit to demand will likely force a wave of closures of less economic refineries,” said Allyson Cutright, director of Global Oil Service at consultancy Rapidan Energy Group.
“We could be moving into a survival-of-the-fittest period,” the refining industry source said. “You will see a more consolidated industry.”
That process has been accelerated by the pandemic, in which even the future of driving, despite its recent comeback, is uncertain.
For example, public school buses, which run on diesel, could stay parked this fall if schools don’t reopen, while a shift to remote work for businesses could become permanent.
“Think about what’s at stake in the next month or so,” Kloza said. “You can see where every part of the finished refined barrel is compromised by COVID-19 and the reaction and memory from it, damage that has been done that might be irreparable.”
