US-headed independent petroleum refiner and marketer HollyFrontier Corporation (HollyFrontier) has announced that its Board of Directors has approved a plan to convert its Cheyenne Refinery in Wyoming (WY) to renewable diesel production and to construct a pre-treatment unit (PTU) at its Artesia Refinery in New Mexico (NM). With the conversion, HollyFrontier will be able to produce over 200 million (US) gallons (≈ 757 million litres) per year of renewable diesel with feedstock flexibility.
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Including the previously announced renewable diesel unit at the Artesia Refinery in New Mexico (NM), HollyFrontier is expected to have a combined capacity to produce over 200 million (US) gallons (≈ 757 million litres) per annum of renewable diesel and pre-treat over 80 percent of its feedstock. HollyFrontier expects to invest between US$650-US$750 million in its renewables business, with an expected aggregate internal rate of return of 20-30 percent.
Cheyenne Refinery to produce renewable diesel only
With expected capital spending of US$125-US$175 million, HollyFrontier intends to repurpose Cheyenne’s current footprint and a portion of its existing assets to produce approximately 90 million gallons (≈ 340.6 million litres) per year of renewable diesel. HollyFrontier expects the project will be completed in the first quarter of 2022 and generate an internal rate of return of 20-30 percent.
The conversion to renewable diesel production will result in HollyFrontier ceasing petroleum refining and reducing the workforce at the Cheyenne Refinery. This decision was primarily based on the expectation that future free cash flow generation in Cheyenne would be challenged due to lower gross margins resulting from the economic impact of the COVID-19 pandemic and compressed crude differentials resulting from dislocations in the crude oil market, coupled with forecasted uncompetitive operating and maintenance costs and the anticipated loss of the Environmental Protection Agency’s (EPA)small refinery exemption (SRE).
Pre-Treatment Unit at the Artesia Refinery
HollyFrontier also plans to construct a PTU that will process over 80 percent of the feedstock for both of HollyFrontier’s renewable diesel plants. The PTU is expected to provide feedstock flexibility, mitigating single feedstock risk, and generating value through the use of lower carbon intensity feed.
HollyFrontier estimates the capital cost of the PTU to be US$175-US$225 million and the in-service date to be in the first half of 2022. The PTU has an expected internal rate of return of 10-15 percent but is intended to protect the returns of HollyFrontier’s renewables business against potential volatility in the feedstock markets.
Demand for renewable diesel, as well as other lower-carbon fuels, is growing and taking market share based on both consumer preferences and support from substantial federal and state government incentive programs. This represents an exciting opportunity to enhance both the profitability and environmental footprint of HollyFrontier through organic investment. Today’s announcements lay the groundwork for an integrated renewables business at HollyFrontier, including multiple renewable diesel plants with feedstock flexibility. After 86 years as a petroleum refinery, Cheyenne will take on a new challenge. We realize that this decision affects many employees, their families, and the community. We are thankful to all of our colleagues in Cheyenne and will work closely with those impacted by this decision, commented Mike Jennings, HollyFrontier’s President, and CEO.
