Petroleum refineries in North America and around the globe are under pressure. Changing market conditions, increasingly stringent environmental regulations, higher costs, and the continual need for capital expenditure are driving a change in strategic direction.
With momentum building in the renewable fuels space, the petroleum industry is looking to convert existing refineries to produce renewable diesel (RD) and sustainable aviation fuel (SAF) by modifying their hydrotreating and separation processes.1 Such conversions are often faster and more cost effective than constructing greenfield renewable fuel production facilities. However, building the business case to convert a refinery is complex and challenging—and compelling for only a few dozen refineries.
This article sets out the drivers, strategies, challenges, and opportunities for refinery conversions in the United States.
What’s driving the switch?
Experience across the refining industry has demonstrated that debottlenecking or increasing the capacity of existing refineries can be more economical than building new facilities from scratch.2 As a result, while overall US refinery capacity has increased over time, the total number of operating refineries has decreased (Exhibit 1).
But the size and scale of refineries matters when determining whether increasing capacity will be viable. While larger refineries have a greater scale advantage for increasing capacity, small and medium-sized refineries lack the economies of scale and capacity to upgrade, making them more expensive to operate and less competitive. This has led to the gradual closure of some of the least competitive refineries in the United States.
Owners of economically challenged refineries are now considering a range of options to convert to renewable fuels production. These options include single-unit and full refinery conversions, coprocessing, and colocation of new facilities.
A major driver for converting a refinery to using renewable feedstock to produce RD and SAF instead of closing the plant comes not from the market but from government policy at federal and state level. Refiners are being incentivized to produce renewable diesel through subsidies and tax breaks, including a blender’s credit of $1 per gallon.3 Refinery conversions also generate credits for renewable transport fuels under California’s Low Carbon Fuel Standard (LCFS), which presents prescriptive environmental standards, and the recent federal Inflation Reduction Act (IRA), which includes further tax credits.4
Without such programs and policies, producing RD and SAF would likely not be profitable. However, within the current framework of both governmental action and investors’ interest, renewable feedstock processing and the production of RD and SAF can play a role in helping refiners achieve their environmental goals.
Conversion of less-profitable refineries to process renewable feedstocks and produce RD and SAF comes with the added benefit of enabling and reducing the cost of compliance with the Renewable Fuels Standard (RFS2). RFS2 compliance costs, specifically renewable identification numbers (RINs), are a major operating cost for refiners. Generating RINs can help alleviate the expense of buying them on the open market to ensure compliance.
The pivoting of existing refineries has led to strong growth in the number of US sustainable fuels plants and the US production capacity for sustainable fuels (Exhibit 2). And the number of RD and SAF refineries and total production capacity, including from refinery conversions, is projected to continue growing.5 At the end of 2022, eight US refineries had been converted to produce RD or SAF (or both), and domestic RD and SAF capacity from refinery conversions, including coprocessing, was around 44 thousand barrels per day (KBD). By the end of 2023, an additional six US sustainable fuels plants are expected to come onstream. With this trajectory, conventional refinery conversions that are planned or underway could more than double current RD and SAF capacity to reach around 230 KBD by 2025.
Before the switch: What to consider in refinery conversion decisions
Refinery owners considering conversions typically consider several economic, regulatory, and environmental factors that can result in decisions to pursue partial conversion, total conversion, or total conversion with the addition of ancillary green energy pathways, like solar or algae (see sidebar, “Partial and total conversions”).
Major considerations in converting an existing refinery into a renewable facility include the type, location and availability of feedstock, the current plant configuration and its production capacity, among others.
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Feedstock proximity
Like in crude oil refining, profitability of sustainable fuel production is largely dependent on the location of the plant in relation to the feedstock. Refineries that are close to sources of soybean oil, distillers corn oil from ethanol production, canola oil, or beef tallow and white grease from beef or pork processing plants will likely have an advantage (Exhibit 3). In addition, refineries near large cities such as Chicago, Los Angeles, and New York are well placed with access to large supplies of used cooking oil (UCO).
Availability of feedstock
The supply-and-demand balance of feedstock is another factor that can impact the viability of refinery conversion. The market for feedstocks for renewable fuels is seeing significant demand growth from the expansion of RD and SAF production.6 Feedstock availability is largely dependent on geographical location and climate. In the United States, corn is the primary source of feedstock for biofuel production.7 Biomass materials such as wood, grasses, agricultural wastes, and energy crops are also used as feedstocks in some regions. Increased local demand is already reducing US soybean-oil export estimates and supporting higher prices.8
Additionally, the use of vegetable oils converted into biodiesel is expected to increase by 46 percent from 2022 to 2027, while the use of UCO and animal fats could exhaust nearly all estimated supplies over the forecasted period.9 As Exhibit 4 shows, even when a broader range of waste oils is included, demand for wastes and residues could still reach 65 percent of total estimated global supply by 2027.
The net effect of the projected supply crunch for renewable feedstocks is that it may slow the number of potential refinery conversions and potentially change the types of projects considered.
Regional incentives
Incentives for refinery conversion differ across the various regions of the United States. For example, the West Coast, including much of PADD 5 (the Petroleum Administration for Defense District, under which the region falls), has strong incentives to consider conversion due to high operating costs of existing refineries, a stringent regulatory environment, and public pushback against hydrocarbons. Another region that will likely have increased incentives to convert is the East Coast, including much of PADD 1, due to the thin relative margins and ease of sourcing traditional fuels from other markets (for example, from PADD 2, PADD 3, and imports).
Impact on the marketplace
Converting refineries to produce renewables impacts markets in several ways. Conversions can cause reductions in total fuels produced, local municipal tax revenues paid by the refinery, and utilities consumed and paid for by refineries; an avoidance of saturating the marketplace with RD and SAF; an inability to provide fuel on interregional exchange agreements and term supplies for local customers; among others. Conversion reduces total fuel output from plants by as much as 80 to 90 percent, which can tighten supplies or increase prices (or both). Refinery conversions in the same marketplace could be weighed up to avoid oversaturation with renewable fuels.
Other considerations
Refinery owners eyeing conversion might also consider factors such as the plant’s existing carbon footprint, emissions levels, renewables credit balances, and the current scale of biofuels or renewables operations. Further, refineries with lower future capital outlay requirements may be more attractive than those requiring extensive retrofitting or redevelopment. On top of this, the presence of infrastructure and equipment that can be adapted relatively easily and at low cost can influence conversion decisions. Lastly, small refineries without scale benefits and refineries with conversion capabilities, such as hydrotreating, esterification, transesterification, upgrading, and multiproduct blending, are ideal candidates for conversion to renewable fuels.
The near-term outlook for refining: Where to now?
Conversion challenges
Converting an oil refinery to renewable fuel production involves several key challenges, including the modification of legacy equipment, regulatory and permitting issues (which can involve a long and complex process that varies by jurisdiction), financing difficulties (which, if secured externally, can be challenging given the risks), supply chain challenges, and workforce issues (which will require significant headcount reductions, retraining, and hiring new personnel with expertise in renewable fuel production). Further, these conversions are often being done on larger scales than in the past, with some costing more than $1 billion.10 This poses challenges with scaling the technology, as well as ensuring large and complex projects remain within cost and schedule.
Scoping for opportunities
As there are many variables involved in decisions on the conversion of petroleum refineries, it is difficult to estimate how many sites could ultimately be converted. A scoping-level view of the considerations presented thus far (before looking at detailed economics) indicates that as many as half of the existing 128 operating refineries in the United States could be physically converted to produce RD and SAF.11
Continued tightness in segments of the US fuels refining sector may extend the economic viability of traditional crude oil processing at some refineries in the next few years. In addition, the pace of energy transition and uncertainty around the resiliency of certain government policies necessary to support refinery conversion economics may slow progress. Because of these factors, it is estimated that only 20 to 25 percent of currently operating refineries could be converted into running and producing RD and SAF economically.12
Not all refineries earmarked for conversion will realize their ambitions, which could ultimately limit the number of potential conversions in the United States to as few as 30. While the number of refineries that may be converted is finite, there are still many options available. To reap the benefits of a refinery conversion, refiners can take the following actions and answer key questions:
- Pick the right sites. All sites aren’t bio-winners. Proximity to feedstock, customers, kit, and regulators all determine success. McKinsey has a comprehensive view of likely candidates and what it takes to win. Do your sites have what it takes?
- Remember that feedstock is king. Do you have the right partnership, origination team, and network?
- Assess your supply chain. How robust is your supply chain and what is the cost to feed the new site?
- Pursue capital projects and T/A excellence. The winning players build the minimum-technical-solution approach to drive maximum value and minimize cost and downtime. Is your approach a winning one?
- Assess your retail pull-through. Do you have the right retail footprint and pull-through to capture the green premium?
Answering these questions can help refiners evaluate their opportunities, build solid conversion strategies, and set up for success.
Refiners face many considerations along the conversion journey. While the suite of regulatory and financial incentives for refinery conversions continues to grow, there are also challenges. To determine whether refiners can successfully convert their facilities to produce renewable fuels, they can comprehensively evaluate their operations—and act now to capitalize.
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