Engineering News

Q&A: Frontier Oil Likes Middle Ground
March 01, 2010

Smaller refiners have hardly been spared from gyrations in gasoline and diesel demand caused by the economic slowdown, but Houston-based Frontier Oil Corp. has avoided some of the heaviest buffeting dealt its larger competitors. The reason, says CEO Mike Jennings, is location. Frontier's two refineries, in Wyoming and Kansas, can process about 187,000 barrels per day for markets in the nation's heartland, more than a thousand miles from behemoth coastal refineries. All the same, Jennings, 44, says no refinery is an island, and capacity utilization at Frontier's plants has been trimmed. He recently spoke with the Chronicle's Monica Hatcher from Frontier's corporate offices on Memorial Drive about issues facing the sector. Some edited excerpts:

Q: As a smaller refining company, are you immune from some of the pressures -- high crude costs and low demand -- that many integrated oil companies and large independent refiners are confronting?

A: Emphatically, no. We are not immune. We are, to a certain extent, insulated in that our geographic markets involve the U.S. mid-continent, so we don't have the direct pressure of coastal refiners, which are very large and very competitive. We're also insulated, to an extent, from imports which come in to the coastal ports from places like India, the Persian Gulf. Typically, the midcontinent is served by smaller refiners. A competitively sized plant might have up to 200,000 barrels, of daily capacity, whereas you look at big plants along the Gulf where we're talking about 500,000 barrels of daily production at an individual plant.

They have huge economies of scale, as well as very good access to waterborne crude oil. For that reason, we want to avoid competing against them. Fortunately, we are insulated by a distance of about 1,500 miles, so we're competing more on a regional basis against more similarly sized plants. But at the end of the day, this business is global, and the competitive pressure they feel on the Gulf of Mexico moves inland via pipelines.

Q: What are the pressures you face?

A: Global demand for refined products has contracted quite a bit. Gasoline demand is probably 5 to 8 percent off its highs. Diesel demand is twice that in terms of its decline. So, what you have then is a big, fixed industrial base -- that being our petroleum refineries -- now competing for a lot smaller market. These plants want to run at 95 percent utilization. The U.S. overall is running about 80 percent utilization. So we've got to scrap for market share. We sell a commodity. It's hard to differentiate it. The only real way to do so is through geography because a barrel on the Gulf of Mexico isn't the same as a barrel in Denver. Also, given our location, we are able to use crude sources coming out of Oklahoma, Kansas, North Dakota, and we are nearer to that production than some other refiners are, so we get the first chance to buy that barrel, oftentimes at a little bit of a discount.

Q: Some people say gasoline consumption hit its peak a couple of years ago. Do you think that is true, or could we see those levels when the economy comes back?

A: I'd like to say that news of our demise is greatly overstated. We have a really high unemployment rate right now. The construction sector, in terms of residential construction, is absolutely on its back. Both of those are drivers toward gasoline consumption. Will we get back to 2007 levels of gas demand? I don't know. Going against that is conservation and biofuels. On the other side is natural growth in population, in the standard of living, and probably in employment and economic activity.

Q: As other refiners think about divesting assets, do you see an opportunity for your company to grow? Will you be looking for opportunities to buy?

A: It's dependent on the asset. If you are talking about companies shedding a medium- to small-size asset on the Gulf of Mexico and consolidating production into other larger facilities, we don't want any part of that because it involves stepping into a disadvantaged position. If, alternatively, somebody is going to vacate a plant in our midcontinent or Rocky Mountains geography out of a strategic shift away from the U.S. downstream and is selling a quality asset in a good market, we are all over it.

Q: If a climate bill materializes any time soon, it looks like it will no longer deliver a double whammy to refiners who would have been subject to restrictions on both emissions from their plants as well as vehicle emissions. What are your thoughts on that and where things stand now?

A: That legislation doesn't appear to have legs at this point for a lot of good reasons. But carbon restrictions probably will be implemented at some point in our future. My view of it is the restrictions should be made neutral as to source and be a level playing field whether imported or produced from domestic sources. If Congress is going to try to provide an incentive to reduce consumption and carbon emissions, the consumer will be the one to pay the price. That is a political fact.

Source: Houston Chronicle

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