The oil industry is one of the largest contributors of greenhouse gasses (GHG). It has also been one of the most impacted industries by climate change thus far, mostly due to regulation.
Thanks to increased regulations from the EPA, IRS, and the California Air Resources Board (CARB), California has seen a faster migration toward renewable fuels than the rest of the country. Each of these government agencies provide environmental credits per gallon of renewable fuel, making it more competitive in the marketplace.
Renewable diesel is chemically identical to petroleum diesel, but is made from a renewable source, commonly beef tallow or vegetable oil. Renewable fuels are considered “drop in” and can directly replace petroleum-based fuels.[i]
Alon USA owns refineries in California and the southern US that have been both positively and negatively impacted by climate change regulations.
In 2012, Alon discontinued crude refinery operations in southern California because of the high cost of crude oil relative to yield and asphalt demand.[ii]
Despite those huge setbacks, Alon was able to leverage their success from their crude refineries in the south to fund an investment into their “California renewables project”. They converted part of the refinery in Paramount, CA to produce renewable diesel and jet fuel that turns about 2,500 barrels per day of beef tallow and other feedstocks into renewable fuels. [iii]
Alon’s jet fuel JV, AltAir, is the “world’s first dedicated commercial-scale renewable jet fuel production facility”, producing 35M gallons per year.[iv]
Alon’s 2016 third quarter results were solid with operating margin of $55.81 per barrel and operating income of $6 million.[v] The environmental credits received for every gallon impactful here because they are recorded as part of Alon’s net sales.[vi]
Alon will face several challenges going forward.
- Credit regulations changes could completely upend their economics
- Consumers can’t make the “green choice” at the pump
- Large competitors who have the capital to invest into renewables
- Feedstock is of limited supply and can only scale so far
Even if consumers at the gas station wanted to make the sustainable decision to pay an extra $1 or $2 per gallon for green diesel, they couldn’t.
Most gas stations don’t have separate tanks for renewable and petroleum diesels so Alon must price their diesel with petroleum diesel. If crude oil prices remain lower than feedstock and if the current subsidy regulations expire or shift, Alon could be underwater.
Alon has the first refinery close to scale in California producing renewable fuel, but most of California’s renewable fuel comes from a larger competitor, Neste, based in Helsinki. Neste has contracted with many cities in California as well as UPS.[vii] Foreign Neste receives these same U.S. environmental credits.
Raw materials/supply chain:
Environmental credits are based off of the carbon intensity (CI) of the entire lifecycle of fuel. Alon must find feedstock that has low carbon intensity in order to produce cleaner fuel and claim more credits. Feedstock emits a lot of GHG even prior to the refining process because the animals create methane and the energy required for transportation to the refinery. Furthermore, there is a limited supply of feedstock, so it cannot produce all fuel.
Suggestions for Alon’s future:
- Continue to scale operations to:
- Compete with the larger companies on the civic contracts, etc.
- Afford overhead, etc. in a world without subsidies.
- Diversify fuel sources via investing (or partnering) in research for future, low CI sources such as algae to be ahead of the trend. Algae can grow nearly anywhere there is sunlight, even in waste water. The yield per hectare could even be greater than vegetable oils.[viii] The potential is great, however, today harvesting algae is still much costlier than feedstock.[ix] (794 words)
[i] Alon USA, 2015 Annual Report, p. 4, http://ir.alonusa.com/all-sec-filings/content/0001325955-16-000064/0001325955-16-000064.pdf, accessed November 2016
[ii] Kristen Hays, Nov 7, 2012 “UPDATE 3-Alon to close California refineries for one year”, Reuters, http://www.reuters.com/article/alon-california-refineries-idUSL1E8M7IXF20121107, accessed November 2016.
[iv] United Airlines Begins Regular Commercial Flights Using Renewable Jet Fuel Made From Honeywell UOP Technology, March 11, 2016, PR Newswire, http://www.prnewswire.com/news-releases/united-airlines-begins-regular-commercial-flights-using-renewable-jet-fuel-made-from-honeywell-uop-technology-300234559.html, accessed November 2016.
[v] Alon USA, “Alon USA Energy, Inc. Reports Third Quarter 2016 Results”, PR Newswire, http://www.prnewswire.com/news-releases/alon-usa-energy-inc-reports-third-quarter-2016-results-300353074.html, accessed November 2016
[vii] Neste, “Solutions for Customers”, https://www.neste.com/en/companies/products/renewable-fuels/neste-renewable-diesel/solutions-customers, accessed November 2016
[viii] Ryan Davis, Daniel Fishman, Edward D. Frank, Mark S. Wigmosta, June 2012, Argonne National Laboratory; National Renewable Energy Laboratory; Pacific Northwest National Laboratory. “Renewable Diesel from Algal Lipids: An Integrated Baseline for Cost, Emissions, and Resource Potential from a Harmonized Model”, http://www.nrel.gov/docs/fy12osti/55431.pdf, accessed November 2016.
[ix] Neste, “Algae oil is a promising raw material for renewable diesel – Neste Oil ensures its supply with conditional purchase agreements”, https://www.neste.com/en/algae-oil-promising-raw-material-renewable-diesel-–-neste-oil-ensures-its-supply-conditional, accessed November 2016.