How might the proposed Washington LCFS impact in-state renewable diesel production and use?

Link to article: https://stillwaterassociates.com/how-might-the-proposed-washington-lcfs-impact-in-state-renewable-diesel-production-and-use/

March 17, 2021
by Jim Mladenik

The Washington state legislature is currently considering legislation (HB 1091) that would require fuel producers and importers to reduce the greenhouse gas emissions attributable to each unit of transportation fuel, a measure known as “carbon intensity.” Carbon intensity includes not only the emissions associated with burning fuels but also the emissions created in extracting and transporting them. Under the bill, fuels’ carbon intensity would have to decline over time, dropping by at least 20% by 2035. Today we explore how this legislation, if passed, might incentivize the production and use of renewable diesel in Washington state.

1. Would an LCFS in Washington Increase In-state Production of Renewable Diesel?

If the Washington State legislature passes legislation enacting a Low Carbon Fuel Standard (LCFS) program, it will almost certainly lead to consumption of renewable diesel (RD) in the state as RD is typically considered one of the fastest ways to reduce carbon emissions in transport fuels. The location of RD production to supply the state, as well as the ability of in-state refineries to increase the production of RD, is less certain and more complicated.

There are multiple approaches to producing RD. These include:

1. Hydrogenation of lipids from vegetable oils, fats, and grease,
2. Conversion of wood waste and municipal solid waste (MSW) to syngas by gasification, with further conversion to RD by a Fischer-Tropsch (FT) process, and
3. Pyrolysis of wood waste followed by hydrotreating.

The first approach listed above is by far the most common used. Here, however, we consider the two less common approaches first. Both approaches convert wood waste or MSW into fuels. As such, we discuss them together for this analysis.

1a. Conversion of Wood Waste and MSW into Fuels

Both of the technologies listed above for the conversion of wood waste and MSW into RD benefit from the fact that the feedstocks are very low cost and available in Washington State. Most residual wood from harvesting forests has no secondary market; it is instead burned to enable replanting and as a means of forest fire protection. The cost to collect and transport the material, however, can be very high if the RD production facility is built at the scale of the current RD projects being developed. Smaller facilities built in proximity to forests with wood waste reduce these transport costs but increase cost-per-barrel of capacity due to reduced scale and increased costs to deliver RD to market.

MSW is plentiful and contains recyclables, wastepaper and plastics. Sorting these to maximize the wastepaper used for gasification and FT processing adds significant capital costs which make this approach the most capital intensive one considered here. This high capital layout is offset by a feedstock cost that is practically zero.

The pyrolysis of wood waste has potential to be commercialized but “is an intricate process that is still not completely understood.” There are no operating facilities in the U.S. but several being commissioned in Europe and Canada, but not at the scale being utilized by the current RD projects being developed by hydrogenation. This technology is not yet been proven for economic scalable commercial development and will not be a factor in Washington over the next five years or more.

The gasification/FT approaches to convert wood waste and MSW to RD have not been used at scale because the technologies are currently more expensive and not yet proven at scale. There are currently at least two projects (RedRock and Aemetis) being developed to convert wood or MSW to fuels, but these are much smaller scale (1-1.6 thousand barrel per day or KBD) than the other RD projects which produce 10 to 30 times the amount of RD, and their commercial success is still to be determined.

Experts at Washington State University recently conducted a study for the Port of Seattle concerning regional opportunities for the production of sustainable aviation fuel (SAF). This study specifically addresses the potential to meet a goal of the SeaTac airport to achieve 10% SAF use from production using local feedstocks. Since RD is similar to SAF and can be produced via the same or very similar chemical processes, this study is useful to understanding the potential use of local feedstocks to produce RD. It should be noted, however, that the quantity of RD that would be needed to meet the aggressive greenhouse gas (GHG) reduction objectives adopted by Washington’s proposed HB 1091 Clean Fuels Standard would be more than ten times the volumes considered in this analysis.

Two key conclusions of this study are:

• “There is adequate volume available of MSW and forest residuals to meet the SEA goal of 10% SAF, however the [minimum selling prices] MSPs for early generation/pioneer plants are estimated to be 3-5x higher than cost of petroleum jet fuel.”
• “MSW and forest residuals-based fuel production facilities will require large capital investments, and the technology has not been proven at scale.”

There are two other issues to be considered when assessing diesel production from wood in Washington state in the next few years. First, the U.S. South has more active mills and produces larger volumes of lumber than the PNW due to lack of harvesting on federal lands and the fact that trees grow faster there in the warmer climate.  Because of this, it is more efficient to produce wood products there, and product prices are lower. As such, it might be more economical to produce diesel from wood products in the South. Second, fuel suppliers have found it to take significant time (two years or more) to obtain approved pathways from the EPA, and there are currently no approved pathways for diesel produced from wood or wood waste. Since projects to produce diesel from wood need the value provided by the RFS[1] in order to be economical, obtaining an approved pathway is another obstacle to overcome when implementing such projects.

These facts support Stillwater’s view that MSW and forest residuals-based fuels are not likely to make significant contributions to meeting Washington’s LCFS program in the next 5-10 years.

1b. Hydrogenation of Vegetable, Animal, and Waste Oils

By far, the most common approach to producing RD is the hydrogenation of lipids. This is because hydrogenation is the lowest cost option, the technology is well-understood, feedstocks are economically transported long distances which enables substantial economies of scale at the production facility, and existing refinery infrastructure can significantly reduce construction costs. Of the dozens of announced projects currently being developed to produce RD, none of them is to be located in Washington. Also, none of them are planned to be built on a “green field site” (which is basically an undeveloped plot of land) because the additional costs of building infrastructure make these projects non-competitive.[2] Instead, there are two types of projects being developed that involve the repurposing of refinery equipment – co-processing and refinery conversion. Let’s address each in kind.

Co-processing is the production of RD using existing petroleum refinery process units to refine renewable feedstocks mixed with diesel fractionated from crude oil. This requires excess unit capacity in a high-pressure diesel hydrotreater along with sufficient hydrogen production and logistics to import, store, transport, and blend renewable feedstocks into the refinery unit. Co-processing also requires the ability to segregate the unit’s production from other products and transport it to market. Currently, there is one refinery in Washington that does this and ships the product blend to Oregon and California. If Washington adopted an LCFS-style program like Oregon’s and California’s, some of this production may remain in-state, and this facility might be expanded to accommodate the additional demand in a new LCFS jurisdiction. It is also possible for other Washington refineries to develop similar projects. Timeline and permitting are also obstacles; in the past, it has taken about three years to design, construct, permit and obtain pathways approved for a co-processing project in Washington state.

A refinery conversion can be utilized to produce RD at much larger scale than co-processing. Most of the current projects are planning to produce about ten times as much RD as the current co-processing facility in Washington.[3] As such, one option for increasing in-state RD production is for an existing refinery to cease processing crude oil and be converted into a dedicated RD production facility. The optimum locations for building RD production facilities should have the following characteristics:

• Existing rail, truck, and pipeline infrastructure
• Existing storage facilities and hydrogen production units
• An existing hydrocracker or high-pressure gasoil hydrotreater
• Access to low-carbon, renewable feedstocks
• Flexibility to transport RD to multiple markets
• Ability to obtain project permits in a timely manner

This could be done with an existing Washington state refinery which would reduce the supply of traditional gasoline, diesel, and jet fuel into the Washington, Oregon, and British Columbia markets since the RD produced from a converted refinery is typically much (70% or so) less than the petroleum products created prior to the refinery shut down

Stillwater analysis of announced RD projects indicates that it costs about $40,000 per barrel per day of capacity to construct an RD refinery on a brownfield site (i.e., a 10,000 barrel-per-day facility would cost $400 million to construct). The estimated Washington demand with an LCFS program for RD in 2030 is approximately 25,000 barrels per day,[4]  which represents one large, world-scale capacity RD facility. The investment required for such a facility would be approximately one billion dollars. The exact amount of the investment will depend on the particulars of the site and existing facilities. Stillwater estimates that the ongoing staffing of such a plant would represent a reduction of 80-90% from the employment levels of the existing refineries.

The ability to convert a refinery site to produce RD would require permitting to modify existing and install new facilities. This process can prove difficult. Phillips 66 and Renewable Energy Group attempted to permit a joint venture RD plant in Ferndale, Washington only to cancel the project in early 2020 “due to permitting delays and uncertainties.” The project was a large RD facility at 250 million gallons per year, or approximately 16,000 barrels per day. As stated above, the estimated 2030 RD demand is estimated to be greater than this.

Overall, a Washington LCFS would increase demand for RD and could incentivize Washington refiners to produce more RD by co-processing. It would also increase the incentives to convert an existing crude oil refinery to an RD facility. However, a Washington state LCFS program is not likely to result in RD production in Washington state at significant scale over the next several years due to lengthy conversion and permitting processes. In addition, these investments would also need to be economically competitive with production outside the state. As a result, most of the RD used to comply with a Washington LCFS, at least in the early years of a Washington LCFS program, would likely come from one of the dozens of projects currently being developed outside of Washington state.

2. Logistics Issues for Growing Renewable Diesel Use in Washington

The logistics for importing, transporting, and storing RD in Washington might present some challenges. If Washington, like California, allows RD to be handled in all existing diesel infrastructure because it is chemically identical to petroleum diesel, then these challenges will be significantly abated. Existing tanks and pipelines would then be used to get RD to market.

Even if this is the case, however, there are two challenges. First, federal law requires labeling of all retail diesel sold that contains 5% or more RD.[5] This has led to a 5% limit in diesel shipped in normal batches on major pipeline systems in the U.S. It’s possible to ship RD blends of more than 5% on pipelines via segregated batches since there are no material compatibility issues for RD on these pipes as is the case for biodiesel. So, it is likely that the 5% limit can be eliminated.  At high levels of RD in the system, once labeling is modified appropriately in all locations, it is possible that the need for segregated batches could be eliminated.

If required or appropriate, segregation of RD from diesel at low levels of RD blending can be handled with existing infrastructure, but as levels of RD blending increase significantly, this might create some challenges for marketers and logistics suppliers.

If Washington does not adopt the California policy that RD and diesel are identical and can utilize the same infrastructure, the challenges that result from requiring dedicated logistics (which include permitting and construction of new storage tanks) could be substantial for selling RD in large volumes. The required segregation would be much like selling a different fuel, such as biodiesel, which is chemically different than petroleum diesel. This would add to transportation and storage costs and could delay the adoption of RD at significant levels.

3. Local Feedstocks for Renewable Diesel Production

As mentioned above, experts at Washington State University recently conducted a study for the Port of Seattle concerning regional opportunities for the production of sustainable aviation fuel (SAF). This study specifically addresses the potential to meet a goal of the SeaTac airport to achieve 10% SAF use from production using local feedstocks. Since RD is similar to SAF and can be produced via the same or very similar chemical processes, this study is useful to understanding the potential use of local feedstocks to produce RD. It should be noted, however, that the quantity of RD that would be needed to meet the aggressive greenhouse gas (GHG) reduction objectives adopted by Washington’s proposed HB 1091 Clean Fuels Standard would be more than ten times the volumes considered in this analysis.

Some of the key conclusions of this study include:

• “The regional supply of lipids is inadequate to support SAF production.”
• “The region has potential for oilseed production; however, the current supply isn’t enough to support SAF production.”
• “There is adequate volume available of [municipal solid waste] MSW and forest residuals to meet the SEA goal of 10% SAF, however the [minimum selling prices] MSPs for early generation/pioneer plants are estimated to be 3-5x higher than cost of petroleum jet fuel.”
• “MSW and forest residuals-based fuel production facilities will require large capital investments, and the technology has not been proven at scale.”

In summary: Local feedstocks to produce RD will not materially contribute to meeting an LCFS program in Washington for at least the next few years.

[1] RD produced from wood with an approved RFS pathway generates 1.7 D3 RINS per gallon.  On March 9^th, D3 RINS were trading at $2.90 each, so the value added to RD would be 1.7 x $2.90 = $4.93 per gallon.

[2] Some expansions of existing facilities (such as at Diamond-Green’s Port Arthur facility) utilize all new production equipment, but these will be able to utilize existing infrastructure for handling feedstocks and products.

[3] Stillwater analysis of news announcements of ongoing and developing RD production projects.

[4] Stillwater estimate from Washington’s CI proposed reduction schedule, projections of low carbon fuels availability, and vehicle fleet evolution.

[5] RD is treated as BD for federal labelling rules.

Categories: Economics, News, Policy, Technology Development