Delaware City Refinery to build hydrogen plant, boost fuel production

The Delaware City Refinery is betting that clean fuel regulations will spark a surge of profits.

Refinery owner PBF Energy announced last week that it will open the tap on a new source of hydrogen at the Delaware City Refinery in late 2019, just before the United Nations imposes sulfur restrictions on fuel for cargo ships.

The announcement is the culmination of long-discussed plans by refinery officials to build a Delaware hydrogen plant, which has been cheered by unions and largely unopposed by environmentalists.

Today, it has stock analysts yelling "buy" for shares of the New Jersey company. 

Hydrogen, a key sulfur-removing catalyst in oil refining, will allow PBF to capitalize on a wave of demand for clean diesel, according to analyst Paul Sankey, who said the company, which owns five refineries, is undervalued by nearly $800 million.

"PBF Energy is one of the main beneficiaries from the International Maritime Organization’s marine fuel spec change in 2020, whereby globally all ships at sea will be required to stop burning heavy sulfur fuel oil," he said. 

The maritime organization, an arm of the U.N., announced last October that it would institute a 0.5 percent global sulfur cap on marine fuels starting Jan. 1, 2020 – a major reduction from the current 3.5 percent standard. 

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Road diesel in the United States already is subject to similar limits. 

PBF Energy CEO Thomas J. Nimbley told investors that for most in his industry "sulfur is the enemy," but not for Delaware City. 

And, with additional hydrogen, not only will the refinery be able to produce larger amounts of low-sulfur fuel for ships, but it will also be able to continue with a key competitive advantage: refining less expensive, heavy crude. 

Because of its "coking" machinery, the Delaware City Refinery is one of the few in the country that can process sulfur-rich, heavy crude oil, which often is brought to the facility by train.

"We'll make a little bit more diesel," he said. "But, the big play is, it will allow us to actually increase the amount of heavier higher sulfur crudes, which we expect to be, obviously, threatened or negatively impacted from a price standpoint in a post (regulation) world."

A company spokeswoman last week confirmed to The News Journal that PBF is in final negotiations with an unnamed firm to build and operate the hydrogen plant. While she declined to disclose further details, past estimates have tabbed construction costs at $100 million. 

Earlier this year, James Maravelias, president of the Delaware AFL-CIO, said the project would be a year's worth of work, at least, calling it "outstanding."  

Nimbley has told investors in the past that a hydrogen plant run by a third party in Delaware City will allow the refinery to purchase the atomic substance "at a fixed cost," without the burden of paying to build and operate a new plant.

The company will spend "a little bit of capital to hook up" the plant, he said.

He also has said the additional source of hydrogen would allow the refinery to generate 7,000 to 10,000 barrels a day of low-sulfur diesel. 

"You're basically going to wind up disappearing 3 million barrels a day of high-sulfur bunker fuel," he said. "There's going to be a lot of bartering going on as people look for opportunities to maybe look to people like PBF."

The facility currently has a smaller hydrogen plant in Delaware City, but it is "not sufficient for what we can really use," Nimbley said. 

Federal records show Delaware City produces 40 million cubic feet per day of hydrogen. 

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Coastal Zone

In 2016, PBF had shelved its hydrogen plans amid volatility in the fuel market.

It was publicly resurrected earlier this year when Nimbley called it "the biggest project that we have on the diesel side."

State regulators issued a final permit in July and so far, environmentalists have remained neutral on the issue, even as they have opposed other refinery proposals in the past. 

Citing Delaware's landmark Coastal Zone Act, environmentalists have argued that the refinery is prohibited from initiating new operations. Meanwhile, the refinery has countered that proposals, such as an ethanol depot or the hydrogen plant, are expansions of current operations, which is allowed under the law.

It's a distinction that can depend on the interpretation and discretion of Delaware regulators, said longtime environmentalist Victor Singer. Those state officials frequently accommodate companies that promise new jobs in Delaware, he said. 

"The state will interpret it favorably for their friends," he said.

Job numbers associated with the hydrogen plant will be determined by the third-party contracting company, the PBF spokesperson said. 

Still, company officials earlier this year confirmed that the project is "essentially" the same hydrogen-production unit upgrade that won the blessing of state regulators three years ago. At that time, PBF estimated the project would provide jobs to 150 construction workers.

In late 2014, PBF first applied for a permit for the project under the Coastal Zone Act.  The project “does not represent a totally new facility,” the company said at the time.

The permits outlined a new hydrogen production unit that would allow removal of about 20,440 tons of sulfur from refinery products, equating to the elimination of 40,880 tons of sulfur dioxide emissions when those products are used.

PBF received its latest permit for the project in July, just before the company reported strong profits for the second quarter of 2018, largely attributed to its ability to process heavy crude. 

"And, if we can run more, we will," Nimbley said to investors.

Contact Karl Baker at kbaker@delawareonline.com or (302) 324-2329. Follow him on Twitter @kbaker6.