U.S.-based pure-play refiners in 2022 were largely able to turn the page on the demand destruction and turmoil of the COVID-19 pandemic as product demand and refining margins surged driven by continued reopening and new geopolitical pressures. 2022 was also a significant year in terms of legislative and regulatory developments for refiners in the U.S. Finally, refiners continued their focus on sustainability and renewable fuels buoyed by increasingly robust subsidies and incentives.
Market Forces Drive Strong Financial Performances
Early in the year, refiners were forced to reckon with the market turmoil stemming from the Russian invasion of Ukraine. Additionally, demand for refined products continued to recover from the lows of the COVID-19 pandemic. Responding to these market pressures, commodity prices and refining margins drove a very strong 2022 for refiners financially. As a result, publicly traded refiners were able to focus on returning cash to shareholders through dividends and stock buybacks with many refiners either increasing their dividends, announcing and executing sizeable buyback programs or both over the course of 2022. These market developments, however, were not universally positive for refiners in 2022 as they became targets of convenience for politicians in an election year looking for a scapegoat for soaring inflation. Refiners will be hopeful that the political pressure subsides as inflation slows and global commodities markets come back into balance.
Legislative and Regulatory Risks and Opportunities
Refiners in 2022 were also met with a rapidly changing legislative and regulatory landscape. In early 2022, refiners were forced to focus on feedstocks as the Russian invasion of Ukraine and resulting Western sanctions made Russian heavy crudes less available and forced a rebalancing of trade flows. As the war in Ukraine continues into its second year and additional sanctions are considered or take effect, refiners will be forced to continue monitoring their feedstocks to keep their refineries running at full capacity.
Congressional passage of the Inflation Reduction Act of 2022 added or amended a number of tax credits of interest to refiners, particularly with respect to renewable fuels. On the other hand, the Inflation Reduction Act included a planned 1% tax on share buybacks, which may skew how refiners approach returning capital to their shareholders. Additionally, refiners were challenged to navigate continued difficulty in the market for RVOs with the EPA’s proposals in December of 2022 doing away with small refinery exemptions in upcoming years and introducing an eRIN system to incentivize production of electric vehicles. In 2023, refiners can expect continued regulatory pressures on their business, but can likely expect fewer big ticket legislative items coming out of a closely divided Congress.
Continuing Focus on Sustainability
In light of regulatory factors discussed above and continued focus from investors and other stakeholders on renewable energy and sustainability, refiners continued to invest heavily in renewable projects in 2022. For example, each of Valero Energy Corporation, Marathon Petroleum Corporation and HF Sinclair Corporation commenced operations at new renewable diesel plants in 2022. Additionally, Phillips 66 made a final investment decision around converting its San Francisco refinery to process renewable fuels. Renewable diesel was not the only focus of refiners in 2022 with market players announcing a wide range of green projects to complement their existing portfolios. Expect refiners to continue innovating in the areas of renewable fuels and beyond in 2023.
ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.