By Laura Sanicola and Stephanie Kelly
June 24 (Reuters) - Refiners such as HollyFrontier Corp and CVR Energy are exploring opportunities to produce renewable diesel to save money on less profitable refineries and offset compliance costs associated with U.S. blending laws.
The product, however, currently only occupies a tiny corner of diesel production - and logistical hurdles are likely to limit its growth in coming years.
Refiners acquire used cooking oil, animal fats and soybeans from restaurants, grocers and farms to make renewable diesel, which is chemically identical to its petroleum-based peer and can be substituted in most diesel engines. The renewable oils are fed into a diesel hydrotreater to remove sulfur.
Just 1.3 million barrels of renewable diesel were produced in 2019, compared with 4.5 million barrels of conventional distillate fuel oil produced every day. Still, investors anticipate strong growth in output because of policy incentives that encourage production.
Federal and state policy has been encouraging refiners to produce renewable diesel through subsidies and tax incentives, including a blender's credit of $1 per gallon expiring in 2022. It also generates credits under California's Low Carbon Fuel Standard (LCFS).
Both HollyFrontier and CVR in recent weeks said they would look to convert existing facilities to handle the growth in this market and reduce costs at certain refining units.
Producing even small amounts helps satisfy refiners' requirement to blend billions of gallons of biofuels into their fuel pool, or buy credits from those that do.
Analysts and refining sources say that logistics could stymie growth in the sector. Companies need to buy fats from all over the country and transport them to renewable diesel facilities to be blended.
New producers must also compete for feedstock with incumbents such as Diamond Green Diesel Holdings in Norco, Louisiana, a profitable joint-venture between refiner Valero and Darling Ingredients, which could drive up costs. (Reporting by Laura Sanicola and Stephanie Kelly; Editing by)