Refiners are shifting toward renewable diesel (RD) for higher growth and better returns, according to analysis from Morgan Stanley.

The prospect of higher growth and better returns through renewable diesel is attracting US refiners. With growing focus on sustainability, Morgan Stanley expects carbon reduction efforts to drive incremental demand for renewable diesel, particularly commercial usage. Project economics are robust, with returns over 30-40%, supported by government subsidies. This is compelling given that typical refining and midstream opportunities offer lower returns and less growth potential. While a niche market that will likely be reliant on policy support for the foreseeable future, renewable diesel nonetheless offers attractive opportunity, particularly for first movers.

Renewable diesel currently makes up around 0.5% of the 430 billion gal/year global diesel market. Through a bottom-up, state-by-state forecast, Morgan Stanley sees North America demand growing 140% from 1.0 billion gal/year in 2020 to 2.4 billion gal/year by 2025. Global consumption should more than double from 2.4 billion gal/year in 2020 to 5.3 billion gal/year in 2025.

“Our bull case sees global demand reaching 6.8 billion gal/year by 2025 through faster adoption and early sustainable aviation fuel (SAF) penetration. Growth beyond stems from more decarbonization initiatives, Brazil pushing towards renewable diesel, and higher adoption of SAF by airlines. With current and in-construction global capacity of 3.8 billion gal/year, there is room for more supply growth, but the word is getting out. Risks include capacity overbuild, the ability to secure sustainable feedstock, competition from imports and other low carbon alternatives, and changes in government policies,” said Morgan Stanley analysts.

While Neste is a first mover, US refiners are beginning to offer growing exposure, particularly Valero. Valero currently produces 275 million gal/year in gross renewable diesel and is in the process of doubling its capacity. Phillips 66 and HollyFrontier are constructing plants, while Marathon Petroleum, Delek US Holding, and PBF Energy are evaluating opportunities. Global integrated oil companies are also venturing into biofuel and renewable fuels.

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