February 7, 2023
By Christine Martin
With the implementation of the Advanced Clean Cars II (ACC II) and the Advanced Clean Truck regulations, California has mandated that all new sales of light-duty vehicles sold in California be 100% zero emissions vehicles (ZEVs) by 2035 and an increasing percentage of new medium-heavy-duty truck sales be ZEV by 2045. How will this huge increase in the ZEV fleet impact petroleum gasoline and diesel demand and, by extension, the future of petroleum refining in California?
Stillwater has a unique talent pool of senior associates who have worked for many decades at several of the biggest refineries across the country. This vast experience allows for interesting insight when asked about refinery survivability. We brought together four of Stillwater’s Senior Associates – along with Chairman, Dave Hackett – to talk about the future of refining under these ZEV sales mandate conditions, what that means for California refiners, and what questions refiners should be asking themselves as they navigate this changing market.
How will the ICEV sales ban affect gasoline demand in California?
There will not be an immediate decrease in gasoline demand starting in 2035 as existing ICEVs will still be on the road. But as demand for gasoline decreases there will be excess product. Some can be exported to other states or countries, but not all of it. Eventually refineries will have to convert to renewable diesel production or shutdown all together. While California refineries are facing the most pressing demand decreases, Oregon and Washington have adopted similar ICEV sales bans. Which refiners will be the first to close, and which will be the last ones standing? There is clearly motivation to stay in the market as margins have been at an all-time high:
An option for combatting declining gasoline demand is for refiners to convert to renewable diesel production. Marathon Martinez and P66 Rodeo refineries have already begun converting to renewable diesel. But feedstock availability is a big question mark. Will there be enough feedstock available to displace the entire petroleum diesel market?
What about infrastructure?
If refineries are forced to shut down due to increasingly strict environmental regulations, or they decide to shut down instead of investing capital for maintenance as petroleum demand decreases, how will California be supplied with gasoline while there are still ICEVs on the road? There aren’t enough existing pipelines to bring in gasoline from other states, and importing gasoline from Asia or Europe is time consuming and expensive. Along the topic of infrastructure – what will happen to the existing retail sites as ICEVs phase out. Will they all be converted to electric charging stations? Can California’s electric grid handle that many charging stations? Because of these infrastructure limitations, there really isn’t too much doom and gloom for the California refining industry for the next 10-15 years. But when it comes to planning capital expenditures for things like turn arounds, 10-15 years really isn’t all that much time.
What are refiners’ options and how can Stillwater help?
It’s best to be the first one out or the last one standing. So how will refiners determine which one they are? Each refinery will make its own decisions based on how they see the world unfolding. Will they try to survive five years running at the status quo? 10 years? Will they convert to renewables? Or will they shutdown and sell their assets? Determining supply/demand outlooks for the next 20 years will be critical in making these decisions, as well as performing competitive market analysis of the petroleum market. Stillwater offers expertly crafted supply/demand outlooks for Northern/Southern California – as well as the Pacific Northwest – which can help refiners to plan for future production needs.