Engineering News

Climate Rules Cloud Outlook for Refiners
January 08, 2009

The specter of stringent U.S. regulation of greenhouse-gas emissions adds another layer of uncertainty for struggling refining companies looking to expand their U.S. plants.

In the past year, refiners have contended with weak profit margins as demand for their products has declined. Analysts have projected that the sector will likely see bankruptcies in 2009 as small, inefficient refiners are forced to close. Some of the companies' financial woes may be compounded by carbon regulations that make operating and expanding plants more costly.

While the Bush administration has granted refiners a brief respite from carbon regulations, new rules are expected under the administration of Barack Obama that may force refiners to cancel expansion projects or, at worst, shutter some refineries.

"Midnight" rules issued by the Bush administration may temporarily lessen the burden on some refiners. Environmental Protection Agency Administrator Stephen Johnson issued a memo Dec. 18, saying large-scale expansions of facilities could be permitted without considering carbon dioxide emissions. This memo, despite opposition from environmental groups, could give permitted projects a distinct advantage.

"It is a good time to submit permits under the Clean Air Act," said Rich Alonso, an attorney with Bracewell & Giuliani in Washington. "To the extent that you delay a permit application by two years, you may have to deal" with carbon regulations, said Alonso, whose firm represents oil refiners.

Off The Table

During the past year, most large refiners have postponed or canceled expansion projects because of tepid oil demand and tight lending conditions. However, a few companies are proceeding with large-scale projects.

Marathon Oil Corp. (MRO) and Motiva, a joint venture between Saudi Aramco and Royal Dutch Shell PLC (RDSB), are undertaking two of the most aggressive expansions at Gulf Coast refineries. Each company plans to grow its facilities to rank among the biggest in the nation. In the Midwest, BP PLC (BP) and ConocoPhillips (COP) are adding units to their refineries to run larger volumes of sludgy, cheap Canadian crude oil.

The largest projects under way will add a total of more than 600,000 barrels a day of new capacity by 2012, and will allow refiners to increase their ability to process heavy grades of crude oil.

While these extensive projects are going forward, independent refiners like Valero Energy Corp. (VLO), Tesoro Corp. (TSO), and Sunoco Inc. (SUN) have cut spending plans for 2009. Some integrated oil companies, which also have extensive U.S. refining networks, have also cut capital spending. Chevron Corp. (CVX) canceled a project to boost the capacity of a fluid catalytic cracking unit at its Pascagoula, Miss., refinery.

Postponing these efforts may be prudent in the short term but could leave the companies vulnerable to tougher regulations down the road. The companies all have long-range expansion plans for their U.S. plants. Philadelphia-based Sunoco, in particular, has an aggressive slate of capital projects planned for five or more years out. The company plans to increase diesel production at its refineries in Pennsylvania and New Jersey, and add equipment to process heavy grades of crude oil at its Toledo, Ohio, refinery.

But refiners say the murky future of carbon regulations makes it difficult to consider future laws when prioritizing expansion projects.

"We're very unclear as a company what we're going to be looking at, so it's hard to make a judgment," said Joe Gorder, executive vice president of marketing and supply for Valero Energy Corp. "There's so many other factors that impact projects and capacity expansion that we know and can see."

These more tangible factors are necessarily prioritized, he said. Valero's decision to postpone the installation of diesel-making units at refineries in Texas and Louisiana was due to current economic conditions, he said.

The Majors Win

Companies able to invest to keep up with changing regulations are likely to be the most successful, said Kevin Book, an analyst with FBR Capital Markets Corp., an Arlington, Va., investment bank and brokerage.

"I think there's an advantage in terms of modernity to having the capital available to make these efficiency improvements," he said. Companies that are unable to keep up may be forced to retire their plants, in a repeat of the raft of U.S. refinery closures that followed implementation of amendments to the Clean Air Act in the 1990s.

"You had a round of refinery closures, where plants were deemed uneconomic," said Ann Kohler, an analyst with New York investment bank Caris & Co. Refineries with a combined capacity of more than 1.6 million barrels a day closed between 1988 and 2002, largely due to an inability to comply with environmental regulations. This represents about 10% of today's total refining capacity. "The same would hold if you're looking at another round of the industry going through significant investment to meet regulatory requirements."

FBR's Book said the integrated majors may have the financial wherewithal to salvage an upside from new climate regulations. "We may be entering a world where the majors win the climate game by being greener on a competitive basis than some of the overseas providers and the small business refiners," he said.

Source: Dow Jones Newswires

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