November 13, 2009
Many More Smaller, Inefficient U.S. Oil Refineries to Shut or Merge
A period of prolonged low refining margins has started to generate plant
mergers and permanent idling in the U.S. refining business.
The recent moves are seen encouraging in order for the industry to recover
from the current down cycle, but many more small, low-complexity, inefficient
U.S. refineries will not survive the ongoing Dark Ages of Refining, according
to a report issued by Credit Suisse late on Thursday.
"We believe that the U.S. refining industry will only return to decent
levels of profitability after the permanent removal of at least 5% of its
capacity or around 900,000 b/d," the bank said. "That figure may take another
couple of years
to achieve."
These inefficient refineries will likely face continued pressure from
imports or from refinery specific issues such as wrongly skewed crude slates or
disadvantaged product yield.
Small refineries with less than 75,000-b/d capacity could also face problems
stemming from insufficient cash to fund delayed regulatory requirements.
Geography plays a significant role in any refinery's long-term viability.
Some plants, which appear marginal in configuration terms alone, will
survive owing to their advantaged locations, normally inland and far from other
competing plants or product pipelines.
The very high cost of transporting refined product by road for any
significant distance can offset a good deal of inefficiency at a local refinery.
At the opposite end of the spectrum, refineries in so-called merchant
centers like the North
East and the Gulf Coast are highly susceptible to competing product imports.
These imports can drive even above average-sized refineries to shut their doors
or convert into terminals.
Credit Suisse said that Gulf Coast and Northeast smaller and inefficient
refineries are most at risk of closure. It gave the recent indefinite idling of
Sunoco's Eagle Point, N.J., refinery as an example.
"Eagle Point was not a terrible refinery but it could not compete
indefinitely with a steady stream of gasoline imports from Europe added to a
collapse of local demand and a consequent low utilization rate," the bank said.
On the West Coast, the recent sharp fall in demand may leave some of the
smaller regional plants exposed to closure even though the PADD 5 market has
traditionally been relatively balanced in demand and supply.
Imports into the West Coast are expensive, and there can be considerable
logistical difficulty in landing, storing, and distributing imported product.
The bank noted that while mergers and acquisitions may be logical from a
business point of view, California's very strict anti-trust laws may render the
point moot by forbidding future business combinations.
NICHE MARKETS
The Midwest region is a net importer of refined product and this renders
PADD 2 less vulnerable to specific plant closures, though not totally immune
given the existence of product pipelines into the region.
Some small plants serve nice markets in PADD II, but some of the region's
small refineries are potentially vulnerable in the current environment,
particularly those on the eastern edge of the district where product incursion
from Northeast is possible.
In the Rockies, refineries enjoy the greatest degree of natural protection
in the U.S.
While most refineries in the Rockies are small they are relatively complex
and they often serve very insulated local markets.
These refineries will likely find a way to survive, unlike many similarly
sized refineries on the Gulf Coast.
Credit Suisse is predicting half of small refineries or about 920,000 b/d of
capacity may be vulnerable to closure if they are not able to meet the ongoing
regulatory requirements.
In practice the number is likely to be less than 50%, as some apparently
vulnerable refiners will find their way into compliance via mergers with nearby
plants, such as seen in Holly's recent deal to acquire the Sinclair refinery in
Tulsa.
"We see potential for similar deals within geographic small refinery
clusters including those at Salt Lake City, Utah, Woods Cross, Utah,
Bakersfield, Calif., Billings, Mont., and Kapolei, Hawaii.
The refining business world-wide is subject to recurring government
requirements to improve fuel quality, generally through removing impurities and
contaminants.
The cost of compliance with these rules can be daunting, and it is often the
impending capital expenditure required to meet a new regulation that forces
refineries to merge, convert to terminals or to shut down entirely.
Stay on top of the market right from your desktop throughout the day with OPIS Intraday Email Alerts. Go here to receive early warning of changing oil dynamics, price changes and supply shifts FREE for the next 5 days. |
November 3, 2009
Gasoline Demand Continues Rise Versus 2008; Up 0.6% YTD: SpendingPulse
U.S. gasoline consumption decreased slightly last week, registering a 0.4%
dip for the week, according to MasterCard Advisors' latest SpendingPulse
gasoline report. As measured by purchases at retail pumps, gasoline demand fell
37,429 b/d to 9.311 million b/d during the week ended Oct. 30.
However, on a year-to-date basis, demand notched another rise and now stands
0.6% higher than the same period
in 2008.
The comparison of demand for the same week a year ago was 3.3% higher, while
demand averaged over four weeks was 3.8% higher versus last year. The
comparisons' strength owes much to the 2008 financial crisis that depressed
consumer spending, mobility and gasoline pumping, said Michael McNamara, vice
president of research and analysis for MasterCard Advisors SpendingPulse.
Pumping volumes in the Gulf, Midwest, West and much of the Eastern regions
were steady to slightly higher on the week, while those in New England and the
Rockies moved lower, McNamara said in notes that accompanied the report. Stormy
weather in the Northeast as well as a snow storm in the Rockies could have
played a role in the week-over-week decline.
Demand was steady despite continued gasoline price volatility, mostly
higher. As of Oct. 30, SpendingPulse noted an 8cts/gal rise, nationwide, to
$2.68 for its Friday-Friday reporting week. The weekly average's 4.7% premium
to the year-ago price was the first year-on-year percentage gain in over a
year, McNamara noted.
As of today, OPIS (in cooperation with Wright Express) shows the average
price of regular gasoline 1.1cts/gal higher at $2.686 compared to seven days
ago.
EIA releases petroleum data for the week ended Oct. 30 on Wednesday. The
agency implies demand from its measure of the total amount of gasoline supplied
from refineries, pipelines, blending plants and terminals on its way to retail
outlets.
A macro-economic indicator, SpendingPulse reports on national retail and
service sales and is based on aggregate sales activity in the MasterCard
payments network, coupled with estimates for all other payment forms, including
cash and check. SpendingPulse does not represent MasterCard financial performance.
Stay on top of the market right from your desktop throughout the day with OPIS Intraday Email Alerts. Go here to receive early warning of changing oil dynamics, price changes and supply shifts FREE for the next 5 days. |
October 20, 2009
Holly to Buy Sinclair's Tulsa Refinery
After months of exploring strategic alternatives for its Tulsa, Okla.,
refinery, Sinclair Oil Corp. said today that it will sell the plant to Holly
Energy Partners.
In a deal due to close before the end of the year, Holly will pay Sinclair
$300 million in stock and cash for the plant and hydrocarbon inventory,
Sinclair said in a press release.
OPIS last week exclusively reported that Holly was the likely buyer for the
facility.
Sinclair has signed a long-term marketing agreement with Holly that will
allow it to continue marketing refined products to both branded and unbranded
customers through the mid-continent, said Clint Ensign, senior VP, Government
Relations.
The deal should appear seamless to wholesale customers, and will not affect
the company's pipeline, terminal, or marketing operations in the region, he
said. Marketing by Sinclair of all transportation fuels will continue without
disruption. The Tulsa light products loading rack will maintain uninterrupted
deliveries to wholesale customers.
Sinclair expects most of its 298 Tulsa employees to be retained.
The company said the sale will allow it to focus refining efforts on its
Wyoming facilities. Sinclair owns a refinery in Sinclair, Wyo., and one in
Casper, Wyo.
Stay on top of the market right from your desktop throughout the day with OPIS Intraday Email Alerts. Go here to receive early warning of changing oil dynamics, price changes and supply shifts FREE for the next 5 days. |
July 7, 2009
Lion Oil Claims Refinery Could Close if House Climate Bill Becomes Law
Lion Oil's 70,000-b/d refinery in El Dorado, Ark., could face closure if the House's proposed climate bill passes
the Senate. Lion Oil Vice President Steve Cousin said that the refinery and company would be unable to offset the costs of buying carbon emission allowances on the open market, even if the majority of the costs are passed onto the consumer.
Under the Waxman-Markey climate change bill, the refinery is set as the point of regulation for greenhouse gas emissions. This requires the refinery to buy allowances annually for covering emissions from the refinery's
operations along with emissions from the use of its products by consumers. For instance, Lion Oil would be
required to purchase allowances for the emissions from any car, truck, tractor or airplane using fuel produced at its
El Dorado refinery.
Under the capped emissions in the bill, this would mean refiners are responsible for more than 50% of the regulated greenhouse gas emissions.
"I strongly believe that if the bill's current allocations stand, the impact on Lion Oil will be profound," Cousins said in testimony to the House Energy and Commerce's subcommittee on Energy and the Environment June 9. "Without a fair and equitable allowance allocation, our company will be unprofitable in year one and insolvent within a matter of months, not years."
Cousins stated that if Congress is holding refiners accountable for emissions from its products after they leave the refinery, then the industry must be provided with a fair and equitable allowance allocation. Currently, the refining industry receives 2% allocation for allowances, and small refiners receive an additional 0.25%. This means that as the CO2 cap-and-trade system is phased in, refiners are not responsible for 2% of their greenhouse gas emissions. Other industries, such as electricity generators, receive allocations for 90% of their CO2 emissions, Cousins said.
"Stated simply, domestic petroleum refiners like Lion Oil are short-changed dramatically with this legislation," Cousins claimed. "The fact is that petroleum will continue to be the primary transportation fuel for this country for the next several decades, and therefore, the current allocation formula must be changed."
On a per ton basis, congressional budget numbers predict the emission allowances to cost $23-$86 once the legislation is in full swing in 2019.
Cousins said at $20/ton of emissions, Lion Oil would have to purchase some 9 million emission allowances on the open market. That would amount to $180 million in additional costs in each of the first two years, and the sum could grow to $750 million by 2030 and nearly $2 billion by 2050.
"Over the last 23 years, Lion Oil's average annual net profits have been $13 million per year," he said. "It is not hyperbole to say that the addition of $180 million per year to the operating costs of a refinery that averages $13 million per year in net profits will make our survival impossible."
Proponents of the bill claim that the additional cost will just pass on to the consumer to result in higher retail prices at the pump.
"This argument reveals a fundamental disconnect between academic economics and the real world in which I and my company operate," he said. "To put it bluntly, proponents of such 'pass through' concepts are wrong."
Cousins said the price at the pump is not just driven by refining costs but also by the consumer.
"Between 2005 and the summer of 2008, the price of crude oil rose 231 percent, while the price of gasoline on the street rose only 122 percent. If refiners like Lion Oil are able to 'pass through' the brunt of our increased crude oil costs to our customers, don't you think we would have done so during this period?"
Even if Lion Oil was able to pass through 90% of the additional regulatory cost to the consumer, that would still leave an additional $18 million in regulatory cost, which represent about 150% of the company's annual net profit.
Understand the Transportation Fuels Policy Change Under President Obama webinar is now available for immediate download. In just 90 minutes, you’ll discover exactly what impact the new Administration’s proposed changes will have on your business. Go here for program details and to download your copy now. |
July 1, 2009
CME to Launch Physical NGL Futures Cleared Using OPIS Spot Prices
Six new physically delivered natural gas liquids futures are expected to start trading and clearing through the exchange's Clearport system later this month. The launch of the products had been expected some time this summer.
Additionally, the exchange saw the first trades of new ethylene futures launched in June.
Trading of the new products will start on July 19, for trade date July 20, an exchange release said. The new futures contracts include: Mt. Belvieu physical LDH propane (OPIS) with delivery at the LDH facility in Mont Belvieu, Texas; Mt. Belvieu physical non-LDH propane (OPIS); Mt. Belvieu physical normal butane (OPIS); Mt. Belvieu physical natural gasoline (OPIS); Mt. Belvieu physical isobutane (OPIS); and Mt. Belvieu physical ethane (OPIS). The Non-LDH propane contract as well as the other four physical NGL contracts will be delivered at the Enterprise facility in Mt. Belvieu.
The contracts are listed for trading by NYMEX through CME ClearPort and are subject to NYMEX rules and regulations.
The first listed month will be August 2009. Both propane futures contracts will be listed for 48 consecutive months. The other contracts will be listed for 36 consecutive months. The contracts will be for 42,000 gallons or 1,000 bbl of product.
On initial reaction, traders thought the new contracts would be good for the gas liquids markets. "I think from a pure liquidity standpoint, it will be good," said one trader.
He thought the contracts would find interest especially from firms that have difficulty getting credit from counterparties. The over-the-counter gas liquids markets have turned to exchange-cleared contracts as the credit markets have tightened and some firms have had letters of credit revoked. Indeed, the CME saw rapid adoption of gas liquids futures swaps (which are financial
transactions) by the industry. Those contracts were launched in November 2008.
In a related development, on Tuesday, the exchange recorded the first trade of new physically delivered ethylene futures that began trading June 15. The first deal was for 50 contracts and today, the exchange witnessed the exchange of 150 contracts, said an exchange source.
Master the NGL industry by attending the OPIS NGL Fundamentals course, September 23-25, 2009 at the JW Marriott in Houston, TX. Discover how NGLs are produced, processed, transported and sold in just 3 short days. Don't miss this opportunity to learn the basics from Anne Keller, one of the industry's most recognized and respected natural gas liquids experts. Visit www.opisnet.com/ngl to register today or call toll-free 866-620-5940. Hurry - register now and save $200! |
June 10, 2009
EPA Weighing Requests to Extend Comment Period on Proposed Rules for RFS2
U.S. EPA has received at least two formal requests to extend the 60-day
comment period on its proposed rules to implement the expanded renewable fuels
standard (RFS2), citing the complicated and voluminous rulemaking analysis that
accompanied the proposal. However, it doesn't appear as if EPA is prepared to
rule on those requests just yet.
As passed under the 2007 energy bill, the 36-billion gal/yr RFS2 is broken
into four segments: a capped corn-based ethanol requirement of 15 billion
gallons by 2015; 21 billion gallons of the overall mandate contains "advanced
biofuels" by 2022, with 16 billion gallons of that amount, under the same
timeframe, from cellulosic biofuel. For the fourth carve-out, up to 1 billion
gallons by 2012 is required to be from biomass-based diesel.
Meanwhile, conventional biofuels would be required to emit 20% fewer
lifecycle greenhouse gas emissions compared to gasoline, while "advanced
biofuels" and biomass-based diesel would be required to emit 50% fewer
lifecycle greenhouse gas emissions, and cellulosic biofuel would be required to
emit 60% fewer emissions.
EPA released its notice of proposed rulemaking for RFS2 on May 5, and began
receiving public comment on the proposal on May 26. Comments are due by July 27.
"The issues in this proposal are numerous and several are controversial,"
officials from the American Petroleum Institute (API) and the National
Petrochemical & Refiners Association (NPRA) wrote to EPA Administrator Lisa
Jackson on June 5. "EPA has rightly taken 18 months since the enactment of
the... [2007 energy bill] to analyze many of these controversial issues. It is
not reasonable, however, for EPA to expect stakeholders to review, understand
and submit constructive comments on these complex issues within 60 days," the
two associations wrote.
In their letter, API and NPRA asked EPA for the comment period to be
extended by 60 days. The letter was not publicized, but API's Al Mannato
mentioned the letter during testimony he gave yesterday during EPA's public
hearing on the expanded RFS.
During the hearing, Mannato also said he didn't believe EPA could meet the
agency's Jan. 1, 2010 implementation date for the expanded RFS, given the
complex issues involved in this rulemaking. In response to a question from
EPA's Margo Oge, Mannato clarified that API is not against the Jan. 1, 2010
start date. "If the agency, by some miracle, can get it done by then, we don't
oppose the deadline. We just don't think it's realistic," he added.
Meanwhile, last month, 24 members of the House Agriculture Committee wrote a
similar letter to EPA, but requested a 120-day extension on the comment
period. "We believe that the current 60-day comment period does not provide
sufficient time for the public to review the 549-page notice of proposed
rulemaking and 822-page regulatory impact analysis, nor does it allow adequate
time for people to prepare their comments," the members wrote to EPA. "The
future of our biofuels industry is too important to rush on such important and
critical issues as what constitutes a renewable biomass feedstock and how to
consider indirect land use changes," the letter added.
During opening remarks of EPA's public hearing on Tuesday, Oge acknowledged
that the agency had received requests to extend the comment period, but said
EPA "had not decided yet on how to proceed on that request."
On a related note, EPA recently extended by 60 days its public comment
period on a request to allow for higher ethanol blends up to 15%. Comments are
now due July 20.
OPIS’ recent webinar, RFS-2: Understanding The Proposed New Rules, is available for download.
Learn everything you need to know about EPA’s changes to the Renewable Fuel Standard in just 90 minutes. Hear from four of the industry’s leading renewable fuels authorities -- including John Weihrauch from the U.S. EPA. Go here now for program details and to download your copy now! |
April 27, 2009
Refiners' Share of Free Carbon Credits too Small: API
The long anticipated energy and climate change bill from Congressional
Democrats has emerged as one even more challenging to the oil industry than
many expected.
The biggest issue of the American Clean Energy and Security Act (HR 2454)
for oil refiners currently is the allocation of free carbon emissions
allowances in the early years of legislation intended to promote U.S. energy
independence and security and cut global warming pollution at the same time.
Under the bill's proposed "cap and trade" system, 15% of carbon dioxide
emissions permits are to be auctioned off beginning in 2012, with the remaining
85% apportioned to industries to ameliorate the higher costs of producing fuel
in a way that emits less of the greenhouse gas.
Industry advocates had lobbied the House Energy and Commerce committee,
whose chairman Henry Waxman (D-Calif.) co-sponsored the bill with Subcommittee
chairman Edward Markey (D-Mass.), to designate 30% of the available allowances
to go to oil refiners but wound up with only 2%. The free allowances would be
phased out over 10 to 15 years.
The bill calls for a 3% reduction in greenhouse gas emissions from 2005
levels by 2012 and cuts of 17% by 2020, 42% by 2030 and 83% by 2050.
The course of the bill, introduced on Friday, is expected to be swift. The
committee moves to mark-up today, May 18, and plans to complete its
consideration before the Memorial Day recess.
The American Petroleum Institute has protested the allocation among
industries, calling it "inequitable" and claiming it will have a
disproportionately adverse impact on consumers and fuel producers.
In a system that has Congress giving away some emissions and selling
others, "if an industry is held responsible for 10%, they should get 10% in
allowances," API President Jack Gerard told reporters in a conference call
Monday.
"Congress should not be picking winners and losers," he said.
Under the proposal, electricity and natural gas distribution companies will
get 30% and 9%, respectively, of the allowances to protect consumers from price
rises. They'll be phased out after 2025. "Energy-intensive, trade-exposed
industries" such as steel, cement and aluminum will get 15% and also be phased
out after 2025 unless the president determines the program is needed longer.
"Petroleum-based fuels are used by everyone," Gerard said, and the proposal
fails to recognize oil's contribution now and in the future, a notion also
borne out in the federal budget's repeal of tax incentives for U.S. oil and gas
producers.
"There's an impression out there that we can flip a switch and move to other
fuels," he said. Analogizing the country's transition away from petroleum to a
home renovation, Gerard urged Congress not to "blow up the foundation while
making it more efficient."
"The reality is that oil and gas continue to play a dominant role and that
needs to be reflected in legislation," he said.
Gerard didn't quantify a percentage figure that would be more equitable, nor
did he offer his estimate of the cost of refiner compliance with greenhouse gas
reduction measures under the current cap and trade proposal. He noted one study
by the politically conservative Heritage Foundation that said a cap and trade
system could raise gasoline prices as much as $1.70/gal at the pump.
While acknowledging the industry doesn't have the influence with the White
House that it did under George W. Bush, Gerard said he was pleased with the
adjustments Waxman had made to the bill so far and he hoped that
his "articulations will influence others."
Understand the Transportation Fuels Policy Change Under President Obama webinar is now available for immediate download. In just 90 minutes, you’ll discover exactly what impact the new Administration’s proposed changes will have on your business. Go here for program details and to download your copy now. |
