Gulf Coast Vulnerable As Refiners Hit Hard Times
August 20, 2009
The Gulf Coast could be the biggest loser in a shakeout of the U.S. refining business that some analysts and industry executives view as inevitable in coming years as rising costs and weaker demand for petroleum fuels pummel the industry.
The region is especially vulnerable not only because it has more plants than other areas and competition is more intense, but because a reduction in refining anywhere would hurt oil and gas companies that support jobs and economic growth in this part of the country.
Yet permanently closing oil refineries may be unavoidable if the industry is to remain profitable in the long term and adjust to what is likely to be a smaller U.S. market for petroleum fuels over time, analysts said.
"If it doesn't happen, it's going to be bad for refining in general," said Alfred Luaces, an industry consultant with Purvin & Getz in Houston.
A recent study by the firm predicted roughly 1.1 million barrels of U.S. refining capacity, about 6 percent, will be forced to close within the next two years amid declining demand for petroleum fuels and surplus capacity at plants. The report projects nearly half of the closures will be on the Gulf Coast.
It followed a July Deloitte forecast that was even more dire: that 2 million barrels, more than 10 percent, of U.S. capacity, could be eliminated in the next several years, including Gulf Coast plants. Others have also recently predicted U.S. refinery closures.
The forecasts come as the U.S. refining industry faces major economic and regulatory hurdles in coming years that could force a broad restructuring of the business.
Regulations to increase the blending of biofuels like ethanol into the fuel supply, along with tougher fuel economy rules, will cut sharply into U.S. demand for gasoline.
Meanwhile, pending climate change legislation, now facing Senate approval after passing in the House, may require refiners to buy pollution "credits" to cover carbon emissions from their plants and from the fuels they sell, boosting costs substantially.
Profit advantage gone
In addition, new refineries opening around the world could force weaker plants out of the business and send cheaper fuel to the U.S., undercutting domestic refiners.
The conventional wisdom had been that the Gulf Coast was shielded from broader industry troubles because fuel plants here are large and flexible, able to process expensive and highly sought-after light, sweet crude oils as well as cheaper, heavy and sour crudes. But with oil prices low across the board, the profit advantage in processing the cheaper oils is gone.
Thinner profit margins in the Gulf Coast also could push marginal players out of business or into the red, said Roger Ihne, a principal with Deloitte's energy practice in Houston.
But he predicts refining won't face a true shakeout until 2012, when several new or pending government regulations take effect.
Output now 85 percent
Today, the U.S. has about 150 oil refineries with a total operating capacity of roughly 17.6 million barrels per day. Over 40 percent of that capacity is located in Texas and Louisiana, and about half of that amount is within the Greater Houston area.
In June, petroleum refineries employed 76,100 people, according to the Bureau of Labor Statistics.
In Texas, petroleum and coal products -- a manufacturing sector that includes refining -- employed 27,000 statewide and 14,300 in the Houston area, Texas Workforce Commission data show.
Refiners began cutting output last year, and are currently running plants at about 85 percent of capacity, well below the 90-plus percent range they have seen in recent years.
Energy Department projections show utilization could drop to 78.5 percent next year, its lowest since 1985, as fuel demand remains weak and new refinery expansion projects come online.
"Every indication we get is that we have too much refining capacity," said Luaces, who projects Gulf Coast plants with less than 120,000 barrels per day of capacity will be most at risk.
Major U.S. oil refiners have been guarded about the outlook for the industry, and none has announced plans to close facilities permanently.
But Exxon Mobil CEO Rex Tillerson told reporters in May "there's no question there are some marginal refiners that probably will not survive."
Officials at Irving-based Exxon, Europe's Royal Dutch Shell and Houston's ConocoPhillips -- all with refining operations on the Gulf Coast -- declined to comment.
Spokesmen for BP in London, for San Antonio-based Valero Energy Corp., and for Chevron Corp., based in San Ramon, Calif., said they have no plans to close American refineries permanently.
'A clear signal'
Valero, the nation's largest refiner, reported a $254 million quarterly loss last month, however, and said it may consider slowing down or idling additional refineries if market conditions don't improve. Valero has indefinitely idled units at its Corpus Christi refinery. It also shut down its plant in Delaware City, Del., this year for economic reasons, though has since resumed production there.
"That was a clear signal that we're getting to the point that we're looking at the possibility that entire refineries could be shut down in the United States," company spokesman Bill Day said. "If Valero's at that point, then I imagine other refining companies are at that point as well."
Source: Houston Chronicle
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