Phillips 66’s LA Refinery Closure and Its Impact on Energy Market Dynamics

The closure of Phillips 66’s Los Angeles-area refinery by year-end 2025 marks a pivotal inflection point in the energy transition, reshaping regional fuel markets and accelerating capital reallocation toward renewable energy. This 138,700-barrel-per-day facility, which supplied 13% of Southern California’s gasoline and 29% of its diesel, will exit a market already grappling with declining demand and regulatory pressures [1]. The decision reflects a strategic recalibration by Phillips 66 to align with California’s decarbonization agenda while mitigating long-term operational risks tied to refining margins and compliance costs [2].

Strategic Reallocation: From Crude to Clean

Phillips 66’s capital reallocation strategy is anchored in its Renewable Fuels segment, which received $74 million in 2025 for optimizing feedstocks and logistics at the Rodeo Renewable Energy Complex (RREC). This facility, repurposed from a former San Francisco refinery, now produces 50,000 barrels per day of renewable diesel and sustainable aviation fuel (SAF), reducing CO₂ emissions by 33,000 metric tons annually [3]. The company’s partnerships with airlines like United and British Airways highlight SAF’s scalability, while a 30.2-megawatt solar facility supports the RREC’s energy needs [4].

However, the Renewable Fuels segment remains unprofitable, with a Q3 2025 pre-tax loss of $116 million, underscoring the financial challenges of transitioning from fossil fuels to renewables [4]. Phillips 66 is mitigating these risks by leveraging federal incentives, including the Inflation Reduction Act’s 30% Investment Tax Credit for renewable projects, and pursuing Foreign-Trade Zone (FTZ) authorization to repurpose refineries for low-carbon fuels [5].

Market Implications: Supply Chain Vulnerabilities and Price Volatility

The LA refinery closure removes 17% of California’s refining capacity, forcing the state to rely more heavily on imported fuels from Asia and Europe [6]. This shift introduces volatility due to transportation costs, geopolitical tensions, and the “Mystery Gasoline Surcharge” tied to regulatory compliance [7]. California’s retail gas prices, already $1.47 above the national average, face further upward pressure as the state’s refining network shrinks [8].

To offset these disruptions, Phillips 66 is expanding its renewable diesel output and collaborating with third-party suppliers. Yet, the transition is not without friction. California’s Low Carbon Fuel Standard (LCFS) provides tradable credits for renewable fuels, but regulatory uncertainty—such as potential modifications to IRA tax credits—remains a risk for long-term planning [9].

Broader Energy Transition Trends

The closure aligns with California’s aggressive legislative agenda, including Senate Bill 1420 (streamlining hydrogen production) and Senate Bill 540 (grid integration with neighboring regions) [10]. These policies create midstream opportunities for investors, such as retrofitting crude pipelines to transport hydrogen or refined products, and developing renewable fuel distribution networks. The 650-acre LA refinery site, now under redevelopment by Catellus and Deca Companies, exemplifies the potential for repurposed infrastructure to support clean energy manufacturing or logistics hubs [11].

Risks and Opportunities

While Phillips 66’s pivot to renewables is strategically sound, it faces significant hurdles. Remediation costs for the LA refinery could reach billions, with limited transparency on cleanup timelines [12]. Additionally, the Renewable Fuels segment’s profitability hinges on scaling production and securing stable feedstock supplies. Investors must also weigh the social implications of the closure, including job losses for 600 permanent and 300 contract workers, and the need for equitable retraining programs [13].

Conclusion

Phillips 66’s LA refinery closure is emblematic of the energy transition’s dual-edged nature: a necessary step toward decarbonization that introduces short-term market instability. For investors, the key lies in balancing the risks of regulatory uncertainty and capital intensity with the long-term potential of renewable fuels and repurposed infrastructure. As California’s energy landscape evolves, companies that successfully navigate these dynamics—like Phillips 66—will likely emerge as leaders in the clean energy era.

Source:
[1] Phillips 66 provides notice of its plan to cease operations at Los Angeles-area refinery [https://investor.phillips66.com/financial-information/news-releases/news-release-details/2024/Phillips-66-provides-notice-of-its-plan-to-cease-operations-at-Los-Angeles-area-refinery/default.aspx]
[2] Energy Transition Squeeze: The Phillips 66 Los Angeles Refinery Closure [https://stillwaterassociates.com/energy-transition-squeeze-the-phillips-66-los-angeles-refinery-closure/]
[3] Phillips 66's Los Angeles-area refinery closure not due to new California regulations, company [https://www.spglobal.com/commodity-insights/en/news-research/latest-news/refined-products/101724-refinery-news-phillips-66s-los-angeles-area-refinery-closure-not-due-to-new-california-regulations-company]
[4] Phillips 66 announces 2025 capital program [https://investor.phillips66.com/financial-information/news-releases/news-release-details/2024/Phillips-66-announces-2025-capital-program/default.aspx]
[5] Phillips 66 weighs renewable fuels projects for US refineries [https://www.ogj.com/members/article/55300443/phillips-66-weighs-renewable-fuels-projects-for-us-refineries]
[6] Strategic Implications of Phillips 66's LA Refinery ... [https://www.ainvest.com/news/strategic-implications-phillips-66-la-refinery-shutdown-energy-transition-plays-2508/]
[7] California's Refinery Closure Drama - Energy Institute Blog [https://energyathaas.wordpress.com/2025/08/18/californias-refinery-closure-drama/]
[8] Refinery closures present risk for higher gasoline prices on the West Coast [https://www.eia.gov/todayinenergy/detail.php?id=65704]
[9] California Continues to Promote Clean Energy Transition Despite Federal Backstepping on Clean Energy and Hydrogen Funding [https://www.allenmatkins.com/real-ideas/california-continues-to-promote-clean-energy-transition-despite-federal-backstepping-on-clean-energy-and-hydrogen-funding.html]
[10] California's Refining Crisis: A Playbook for Energy Infrastructure Investors [https://www.ainvest.com/news/california-refining-crisis-playbook-energy-infrastructure-investors-2506/]
[11] Phillips 66 provides notice of its plan to cease operations at Los Angeles-area refinery [https://investor.phillips66.com/financial-information/news-releases/news-release-details/2024/Phillips-66-provides-notice-of-its-plan-to-cease-operations-at-Los-Angeles-area-refinery/default.aspx]
[12] There's a 'lake' of oil under LA's soon-to-close refinery. ... [https://laist.com/news/climate-environment/phillips-66-oil-refinery-closure-cleanup]
[13] Planning for Refinery Closures That Benefit Workers, Communities, and the Environment webinar - 31 July 2025 [https://clean-coalition.org/news/planning-for-refinery-closures-that-benefit-workers-communities-and-the-environment-webinar-31-july-2025/]