After markets closed Tuesday, Neste (OTCPK:NTOIF) and Marathon (NYSE:MPC) announced a renewable fuels joint venture, whereby the Finnish fuels producer will pay Marathon (MPC) $1b for 50% of its Martinez project. The project is expected to have production capacity of 260mg/y by the 2nd half of 2022, and 730mg/y by the end of 2023. The conversion is budgeted to cost $1.2b.
Neste (OTCPK:NTOIF) is a Helsinki-based refinery that has made a name for itself by converting a majority of its oil refining assets to renewable diesel production. The Company is unique amongst peers, as it has developed sophisticated supply chains to source waste and residues, rather than relying on edible food products for feedstock.
The Martinez refinery has capacity to refine ~160kb/d of crude oil and serves the San Francisco market. Post conversion, at peak capacity, the plant will produce ~48kboe/d. When Martinez is fully converted, local fuel supplies to the market will fall, likely increasing margins for all refiners in the region. Additionally, the Marathon (MPC) and Neste (OTCPK:NTOIF) joint venture will benefit from potentially lucrative renewable fuel blending mandates and California carbon credits.
The transaction is subject to customary closing conditions, including obtaining permits, which depend upon certification of a final Environmental Impact report. The transaction follows Chevron’s (NYSE:CVX) acquisition of Renewable Energy (NASDAQ:REGI) Monday. By lowering total refined product supply, while collecting substantial subsidies, refiners have developed a new, highly profitable market and moved aggressively to capitalize in recent years. In the case of this joint venture, the conversion is unlikely to increase food prices, as Neste (OTCPK:NTOIF) is a specialist in sourcing waste and residue, unlike peers who rely heavily on soybeans for feedstock.