Renewable diesel — also known as green diesel, hydrotreated vegetable oil, or hydrotreated esters and fatty acids — has now gained widespread attention throughout the world. This growing interest is turning into action as existing renewable fuels companies build grassroots facilities and purchase idle refineries. Oil companies are also busy coprocessing, building new facilities, repurposing refineries, and converting diesel hydrotreaters and hydrocrackers to renewable diesel units.
The pace of this shift is extraordinary — suggesting that the fatty acid methyl esters (FAME) biodiesel and oil industries should brace for substantial long-term change over the next few decades.
U.S. oil companies have long been challenged by the cost of renewable identification numbers (RINs). Today’s pandemic increases the pressure on the industry to explore the sustainable business options of renewable investments. While oil companies have been looking into these ventures since the 1970s, it wasn’t until recently that more companies moved beyond passive investments in electric vehicle charging stations, wind power, algae research and corn ethanol.
With leadership from Neste, Valero and Renewable Energy Group, along with California’s Low Carbon Fuel Standard (LCFS) and the European Union’s Renewable Energy Directive II, the focus has quickly shifted from expansion, molecule management and petrochemicals projects to processing a substance unfamiliar to the average oil refinery chemical engineer. Renewable diesel has stepped in to provide a temporary solution, at minimum, with companies investing nearly $750 million to $1 billion per site.
The formula appears simple for the average oil company: Take advantage of the LCFS market, offset renewable identification number (RIN) obligations and benefit from the Blender's Tax Credit. However, it’s never that simple. Periods of rapid growth can often result in future regrets if investors fail to consider the long-term impact. Renewable diesel comes with an enormous number of economic variables, including feedstock availability, RIN pricing, capital expenditure escalation, product pricing and future legislation. As renewable diesel production accelerates, producers must look beyond the five-to-10-year horizon and consider myriad factors, such as:
- Carbon intensity of the renewable diesel facility and feedstock
- Procurement of the desired feedstocks
- Emerging feedstocks
- Risks associated with renewable diesel production
- Current and future markets for renewable diesel
- Variability of feedstock and product price
- Outlook for the Blender’s Tax Credit, California LCFS and RINs
To navigate this ever-changing environment, it’s critical to have a tool that can assess the risk and be understood by the people who can weigh the magnitude of those risks on an organization. To manage high-risk investments, Monte Carlo has long been a reliable methodology. This type of economic analysis tool allows organizations to quantify the risks associated with renewable diesel. It helps paint a realistic picture of the range of investment return one can expect from a modest or ambitious renewable diesel project.
It is important that organizations are fully aware of the economic variables to assure that their renewable diesel ventures become sustainable investments. While there’s no crystal ball with a clear picture of revenues and expenditures, a deep technical and economic understanding can bracket the range of possibilities and guide renewable diesel projects from uninformed ideas to a sustainable business.
Organizations developing, constructing and commissioning new renewable diesel plants must consider various market conditions to avoid poorly made investments.
