Engineering News

US Refining Suffering Painful But Necessary Restructuring
October 01, 2011

BMI View: Planned divestments in the US downstream confirm the geographical rebalancing from the north-east to the mid-west, Rockies and Gulf Coast. The plans also hint at the growth potential of diesel production for both domestic consumption and export.

Three leading US downstream players look set to sell refining assets. Valero Energy, the country's largest independent refiner, has reached an agreement to buy Murphy Oil's 135,000 barrel a day (b/d) Meraux refinery in Louisiana. This will be the company's sixth Gulf coast refinery, and Valero is hoping to integrate it with its 250,000b/d St. Charles refinery, which is also in Louisiana.

Philadelphia-based Sunoco, one of the country's largest fuels retailers, has announced its intention to disengage completely from the refining industry by selling its two remaining plants: the 335,000b/d Philadelphia refinery and the 178,000b/d Marcus Hook refinery, both in Pennsylvania. Sunoco has been restructuring its business for years, refocusing most of activities in the fuels retail marketing and logistics sectors.

Finally, oil major ConocoPhilips is rumoured to be considering putting its 238,000b/d Baywater Refinery in New Jersey on the block, along with its 185,000b/d Trainer Refiner in Pennsylvania. The company did not deny the report, but instead declared that it had 'made no statements to that effect'. However, the move would be in line with the company's plan to sell its less complex refineries as part of the corporate restructuring that will see its downstream portfolio spun off into a separate business.

Louis Louis
US Refining Capacity By Region, b/d

Source: BMI Global Refining Database

Consolidation Through Shifting Sands

Consolidation in the US downstream is the result of several factors that have forced refiners to change their product mix and geographical focus:

Geography

The planned sales confirm the decline of the east coast's refining sector. Refining margins for August 2011 were only US$10/barrel (bbl) in the north-east. These margins are only slightly lower than the US$13/bbl of the west coast, but they are much lower than in the Midwest and the Rockies, where the margins were US$35/bbl and US$45/bbl respectively. These two latter regions benefit from both a captive market and cheap landlocked crudes from the US and Canada. For this reason, BMI believes that closures in the north-east will accelerate whereas other regions will continue to thrive. We suspect that Sunoco's and ConocoPhilip's refineries, all located on the east coast, will struggle to find buyers and are likely to be closed or converted into storage terminals.

Regulatory changes

A Ella Le Gusta La Gasolina
Breakdown Of US Refined Products Consumption (2009)

Source: US Energy Information Agency

Refining plants in the US are also likely to increase in complexity as companies will try to increase their ability to better satisfy shifting demand. The 2011 Corporate Average Fuel Economy Rule (CAFE) requires passenger vehicles built in 2011 to achieve 27.8 miles/gallon (10.2 litres/100km). Hart Energy estimates that diesel engines carry vehicles 25% further per tank than gasoline engines. This readily available fuel and technology would help manufacturers achieve CAFE goals. Currently, diesel only powers about 3% of US passenger vehicles, but this figure could reach 8% by 2025, according to Allen Schaeffer, executive director of the Diesel Technology Forum. We do not expect diesel to overtake gasoline in the US; however, as diesel margins are often substantially higher, increased complexity could help refiners adapt their production to shifting demand.

Export growth

Growth in diesel production will also be pushed by the shift in focus from the domestic market towards emerging markets in Latin America. Royal Dutch Shell and Saudi Refining have expanded the diesel export capacity of their 285,000b/d Port Arthur refinery. This refocusing of production will most likely benefit the Gulf Cost, where US$33/bbl margins already offer a strong incentive. This is corroborated by Valero's disengagement from the east cost through the sale of its New Jersey plant in 2010, the closure of its Delaware facility, and its planned acquisition of the Meraux refinery.

Source: BMI Americas Oil and Gas Insights

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