T. Fitzgibbon and K. NARIMAN, McKinsey & Co., Houston, Texas; and B. ROTH, McKinsey & Co., Minneapolis, Minnesota
Petroleum refineries around the globe are under pressure. Changing market conditions, increasingly stringent environmental regulations, higher costs and the continual need for capital expenditure are driving a change in strategic direction.
With momentum building in the renewable fuels space, the petroleum industry is looking to convert existing refineries to produce renewable diesel and sustainable aviation fuel (SAF) by modifying their hydrotreating and separation processes—SAF is a “drop-in” fuel that has similar properties as traditional fossil jet kerosene but can have lower lifecycle greenhouse gas emissions when produced from renewable and waste feedstock sources. Such conversions are often faster and more cost effective than constructing greenfield renewable fuels production facilities. However, building the business case to convert a refinery is complex and challenging—and compelling for only a few dozen refineries.
This article details the drivers, strategies, challenges and opportunities for refinery conversions in the U.S.
What is driving the switch? Experience across the refining industry has demonstrated that increasing the capacity of existing refineries can be more economical than building new facilities from scratch. As a result, while overall U.S. refinery capacity has increased over time, the total number of operating refineries has decreased (FIG. 1).
However, the size and scale of refineries matters when determining whether increasing capacity will be viable. While larger refineries have a greater scale advantage for increasing capacity, small- and medium-sized refineries lack economies of scale and capacity to upgrade, making them more expensive to operate and less competitive.
Owners of economically challenged refineries are now considering a range of options to convert to renewable fuels production, including single-unit and full refinery conversions, co-processing and co-location of new facilities.
A major driver for converting a refinery to using renewable feedstock to produce renewable diesel and SAF comes from government policy at the federal and state level. Refiners are being incentivized to produce renewable diesel through subsidies and tax breaks, including a blender’s credit of $1/gal.1 The conversion of less-profitable refineries to process renewable feedstocks and produce renewable diesel and SAF comes with the added benefit of enabling and reducing the cost of compliance with the U.S. Renewable Fuels Standard (RFS2).
The pivoting of existing refineries has led to strong growth in the number of U.S. sustainable fuels plants and the U.S. production capacity for sustainable fuels (FIG. 2). Additionally, the number of renewable diesel and SAF refineries and total production capacity, including from refinery conversions, is projected to continue growing, according to the authors’ company’s project database. The current trajectory predicts that conventional refinery conversions that are planned or underway could more than double current renewable diesel and SAF capacity to approximately 230,000 bpd by 2025.
Before the switch: What to consider in refinery conversion decisions. Refinery owners considering conversions typically contemplate several economic, regulatory and environmental factors that can result in decisions to pursue a partial or total conversion. Major considerations in converting an existing refinery into a renewable facility include the type, location and availability of feedstocks, the current plant configuration and its production capacity, among others. It must also be considered that incentives for refinery conversions differ across the various regions of the U.S.
Feedstock proximity. Like in crude oil refining, the profitability of sustainable fuel production is largely dependent on the location of the plant in relation to the feedstock. Refineries that are close to sources of soybean oil, distillers corn oil from ethanol production, canola oil, or beef tallow and white grease from beef or pork processing plants will likely have an advantage (FIG. 3). In addition, refineries near large cities such as Chicago, New York and Los Angeles are well placed with access to large supplies of used cooking oil (UCO).
Availability of feedstock. The supply-and-demand balance of feedstock is another factor that can impact the viability of refinery conversions. The market for renewable fuels’ feedstocks is seeing significant demand growth from the expansion of renewable diesel and SAF production.2 Additionally, the use of vegetable oils converted into biodiesel is expected to increase by 46% from 2022 to 2027, while the use of UCO and animal fats could exhaust nearly all estimated supplies over the forecasted period.2
The net effect of the projected supply crunch for renewable feedstocks is that it may slow the number of potential refinery conversions and potentially change the types of projects considered.
Impact on the marketplace. Converting refineries to produce renewable fuels impacts markets in several ways, from reductions in total fuels produced to an inability to provide fuel on inter-regional exchange agreements and term supplies for local customers, among others. Conversion reduces total fuel output from plants by as much as 80%–90%, which can tighten supplies and increase prices.
Other considerations. Refinery owners eyeing conversion might also consider factors such as the plant’s existing carbon footprint, emissions levels, renewables credit balances, and the current scale of biofuels or renewables operations. The presence of infrastructure and equipment that can be adapted relatively easily and at a low cost can influence conversion decisions. Small refineries without scale benefits and refineries with conversion capabilities are ideal candidates for conversion to renewable fuels.
Conversion challenges. Converting an oil refinery to renewable fuels production involves several key challenges, including the modification of legacy equipment, regulatory and permitting issues, financing difficulties, supply chain challenges and workforce issues.
Scoping for opportunities. As many variables are involved in decisions on the conversion of petroleum refineries, it is difficult to estimate how many sites could ultimately be converted. A scoping-level view of the considerations presented indicates that as many as half of the existing 128 operating refineries in the U.S. could be physically converted to produce renewable diesel and SAF.
Not all refineries earmarked for conversion will realize their ambitions. To reap the benefits of a refinery conversion, refiners can take the following actions and answer key questions:
Refiners face many considerations along the conversion journey. While the suite of regulatory and financial incentives for refinery conversions continues to grow, challenges remain. To determine whether refiners can successfully convert their facilities to produce renewable fuels, they can comprehensively evaluate their operations and act now to capitalize. HP
LITERATURE CITED
TIM FITZGIBBON serves petroleum clients around the world, drawing on deep specialist expertise on topics related to refining strategy and petroleum market economics, and leads research on petroleum market outlooks.
KHUSH NARIMAN helps clients in the energy, chemicals and manufacturing industries as they address operational and organizational challenges. He helps to optimize their portfolio and set new growth strategies.
BRIAN ROTH serves clients primarily in the chemicals, oil and gas, and materials sectors on a variety of operations and strategy topics. He leads McKinsey & Co.'s downstream oil and gas work in the Americas.