Valero goes all-in on biodiesel
San Antonio refiner also is investing heavily in a system to capture carbon
SAN ANTONIO — Valero Energy is staking its future on the belief that not all cars and trucks will be powered by electricity in the years to come, and the world will still need liquid fuels.
The San Antonio refiner is going all in on carbon capture projects and renewable diesel, a fuel produced from animal fats and waste products, such as used cooking oils.
Other U.S. firms are doing the same. Houston refiner Phillips 66 said it plans to produce 800 million gallons of renewable diesel annually by 2024, and Ohio-based Marathon Petroleum said in March it would convert a California refinery to produce the fuel.
In contrast, the European oil majors BP, Shell and Total are aggressively positioning themselves for a future significantly less de
pendent on fossil fuels. They’re pouring billions of dollars into solar, wind and hydrogen projects.
Valero has spent hundreds of millions of dollars since 2018 to expand its renewable diesel business. The company boosted production at its biodiesel refinery in St. Charles, La., and is building a new production facility at its Port Arthur refinery, which will be completed in 2023.
Valero says when both projects are finished, it will produce 1.2 billion gallons of renewable diesel annually, making it the nation’s largest producer of the fuel. Renewable diesel can power any diesel vehicle on the road today. Valero estimates the biofuel reduces emissions by 80 percent compared to regular diesel
Valero is wagering that more states will adopt low-carbon fuel standards that will increase demand for renewable diesel.
“We have a clear recognition here that low-carbon fuels are going to be in much greater demand going forward,” Valero President and CEO Joe Gorder said during the company’s first-quarter earnings call in April.
The expansion of Valero’s biofuel business is part of the company’s efforts to shrink its carbon footprint. In March the board of directors added a clause to Gorder’s compensation package that ties a portion of his pay to meeting targets related to cutting greenhouse gas emissions and investing in lowcarbon ventures.
The board was responding to a request filed by Valero investors who wanted the refiner to cut its emissions. The group of shareholders was represented by As You Sow, an investor advocacy group.
Tying executives’ compensation to climate-related goals is “one of the single most effective tools” to curb a company’s pollution, said Nick Volkmer, vice president of intelligence at Enverus, an oil and gas analytics firm.
“It’s becoming a lot more common across the space,” Volkmer said. “You’ll see executives restructure their compensation around emissions-reduction targets, and then you’ll see pretty dramatic drops in a company’s emissions profile.”
Since 2011, Valero said, it has cut its greenhouse gas emissions by 20 percent. By 2025, the company aims to reduce its emissions by 63 percent, including offsets — reductions in emissions that companies use as credits to compensate for their carbon or greenhouse gas emissions elsewhere.
‘Let’s stick to our guns’
In an electrifying world where Shell and other energy giants are investing in clean-energy projects such as offshore wind — and Germany and other European countries are exploring new power sources such as hydrogen — Valero is keeping it simple.
The company has long refined liquid fuels. It’s still doing that, just with fewer carbon emissions, Volkmer said.
“It’s kind of ‘Let’s stick to our guns. Let’s stick to what we’re good at,’ ” Volkmer said. “Let’s not necessarily diversify, but let’s be leaders in our own industry.”
Valero’s renewable diesel business took off after the company expanded its St. Charles refinery in late 2018. Renewable diesel sales dipped amid the pandemic last year, but the company set a record for production of the fuel last fall. And Valero’s output will increase as it completes another expansion at the refinery later this year.
Still, renewable diesel is tiny slice of Valero’s output. Its production goals over the next two years equate to roughly 78,000 barrels a year, compared to a refining capacity topping 3.2 million barrels per day.
“It’s a step in the renewable direction. It allows Valero to say that it’s not just part of the problem, it’s also part of the solution,” said Stewart Glickman, an analyst at New York-based CFRA Research. “But in context, it’s still small potatoes.”
Turner Mason and Co., a Dallas energy consulting firm, estimates U.S. production capacity for renewable diesel reached 50,000 barrels per day at the end of last year. By 2025, the firm projects that will grow to 300,000 barrels per day.
As production increases, Valero and its competitors — such as HollyFrontier, Marathon Petroleum and Nesté, the world’s largest renewable diesel producer — are finding it getting harder to get used cooking oil and other feedstocks to produce renewable diesel. Refiners producing the diesel often buy used cooking oil from restaurants or feedstocks from agricultural commodities firms.
“Used cooking oil is pretty close to being tapped out right now in the U.S.,” said Martin Parrish, Valero’s point man on renewable fuels, during the company’s earnings call in April.
Carbon capture
Valero announced in March it invested in a carbon capture project that will span five Midwest states. The system will ferry carbon from some of Valero’s ethanol plants and other facilities along a 1,200-mile pipeline that will store the carbon at a site likely to be located in southern Illinois.
Valero partnered with Navigator Energy Services and the investment giant BlackRock. The system is to be completed by late 2024.
Some large U.S. oil and gas firms have focused on carbon capture projects as a method of reducing carbon emissions; these include Exxon, which has proposed a public-private partnership to build a $100 billion carbon capture project near Houston.
The systems capture and store carbon that otherwise would go into the atmosphere and contribute to global warming.
The technology behind carbon capture is nascent, but experts say removing atmospheric carbon is necessary to achieve net zero emissions globally by 2050, according to the International Energy Agency.
But unlike the company’s renewable diesel business, carbon capture may not immediately deliver profits for Valero, Glickman said. Energy companies could make money off carbon capture projects by selling emissions offset credits — eventually.
“If a firm like Exxon, which is trying to do carbon capture, hasn’t been able to turn that into a profitable venture yet, that’s a tough row to hoe,” Glickman said. “That very well might be a loss generator for some years before it turns positive.”
Safe bet?
In the long run, the prospects for Valero’s renewable diesel business hinge primarily on whether more states adopt low carbon fuel standards. Valero sells nearly all its renewable diesel in California and Canada, which require low-carbon fuels. But other states, including New York and New Mexico, are considering stricter standards for carbon-emitting fuels.
The refiner’s “early mover” status in renewable diesel fuel could give the company an edge in a netzero emission world, Glickman said.
“If you do have more states that decide to shift in this direction, that’s going to put some wind in the sails of more energy demand that is renewable-related,” he said. “Then Valero will probably be in as good a position as anybody to expand even further.”