Exclusive-California Bay area regulators probe Phillips 66 refinery work -email

© Reuters. FILE PHOTO: U.S. oil company Phillips 66 headquarters in Houston, Texas, U.S., September 27, 2020. Picture taken September 27, 2020. REUTERS/Gary McWilliams

By Laura Sanicola

(Reuters) - California Bay Area regulators are investigating whether Phillips 66 (NYSE:PSX) failed to obtain necessary permits to produce renewable fuels at its oil refinery in Rodeo, according to an email reviewed by Reuters.

The refiner is undergoing a multi-step conversion of the plant to turn it into the world's largest producer of renewable fuels using feedstocks such as soybean oil and animal fats. California is the biggest gasoline market in the United States, but some of the state's 14 refineries are not always profitable. Several are looking to survive long term by cashing in on state incentives for production of lower-carbon fuels.

Phillips 66 started to process small volumes of soybean oil at the Rodeo refinery in the first quarter of 2021, the company said this year.

The Bay Area Air Quality Management District (BAAQMD), which regulates stationary sources of air pollution in the region, is investigating whether the company modified its refinery without getting required additional permits, according to an email last week seen by Reuters.

Phillips 66 wants the Rodeo project to produce more than 800 million gallons of renewable diesel, renewable gasoline and sustainable jet fuel annually. That effort requires increased use of hydrogen, which can cause flaring events and refineries to malfunction, environmental groups say.

At least 10 groups, including the National Resources Defense Council, have complained to regulators about the additional emissions produced by using more hydrogen to treat feedstocks like soybean oil and animal tallow.

The NRDC, in a July letter, argued that Phillips 66 did not request proper approval from the air quality management district to start processing that oil this year.

The management district, in its email this month to NRDC, said it will conduct an on-site investigation and engineering review of the Rodeo facility, the email said.

Phillips 66 told Reuters it obtained the necessary permits to produce renewable diesel from an existing hydrotreater as part of a standalone flexibility project. The management district declined to comment.

REFINERS IN TRANSITION

The renewable diesel market is small but growing quickly. The U.S. Energy Department projects it will be about 7% of the overall diesel pool by 2030. Refiners see it as an opportunity to shift to lower-carbon fuels even as electric vehicles become more popular.

Unlike refining petroleum products, producing those fuels requires additional hydrogen to remove oxygen from fats and oils used for making renewable fuels. Groups including the NRDC, the Sunflower Alliance and the Rodeo Citizens Association told regulators they are concerned air emissions at the facility will increase because of this process.

Phillips 66 said it does not need to increase Rodeo's capacity to generate hydrogen, and said estimated emissions from hydrogen generation will be part of Contra Costa County's independent Environmental Impact Report, which is not yet complete.

“We are confident the analysis in the EIR will demonstrate the project stands to significantly reduce emissions from the facility,” Phillips 66 said in a statement.

Environmental groups say the facility will need to add more hydrogen generation capacity than what is permitted, particularly if the refiner uses soybean oil.

Hydrogen-related reactions caused seven flaring events at the Rodeo and the nearby Marathon owned Martinez refineries in the last five years, causing the units’ hydrotreaters, hydrocrackers and other units to malfunction, according to reports filed by the refiners with regulators.