Fitch analyst calls gasoline imports "a thorn in the side of (US) refiners"

By OGJ editors

HOUSTON, Nov. 14 -- October was a bright spot in a dismal year for US refiners although product prices have fallen again despite low gasoline inventories, Bryan Caviness, a downstream analyst with Fitch Ratings Oil & Gas group, said during a teleconference call earlier this week.

"It's likely that some downstream players earned more in October than they did in any of the last 4 quarters. The volatility of the industry however has reared its head again. . . Looking forward, product imports will continue to be a thorn in the side of (US) refiners. There has been nonstop and record gasoline imports in the Northeast, and we really don't expect any cutbacks until ultralow sulfur gasoline hits in 2004," he said.

Imports
Pending US gasoline and diesel sulfur reduction regulations are likely to reduce the future sources of imported gasoline, he said. Separately, Merrill Lynch analyst Andrew Fairbanks made similar comments in a recent research note (OGJ, Nov. 11, 2002, p. 7).

Caviness said, "The bulk of the additional imports over the last couple of years has come from Canada and Western Europe where refining regulations run lock step or stricter than the US. What we've seen is an increase in imports from fringe importers such as Russia, Brazil, and even India. In addition to finished gasoline, there is a high percentage of gasoline blend stocks being imported, approximately 40% of the total."

"It's yet to be seen which foreign refiners will invest the capital to bring the sulfur content down. Overall, Fitch doesn't expect a lot of these refiners to spend the money," he added.

Although volatility is expected for the downstream sector, Caviness said Fitch has a stable and somewhat positive outlook for the US refining sector in 2003.

"Several factors could push margins up next year. An improving economy and continued strong demand will only help. However, most refiners have been weakened by their own actions in conjunction with the downturn in the industry cycle. Free cash flow has been nonexistent, and there are a lot of investments to be made," he said.

Investments
The capital budgets estimated to be required to meet pending US gasoline and diesel sulfur reduction regulations are higher than many refiners' traditional budgets, Caviness said.

"Someone will have to pay for the investments, and if a refiner doesn't think he can be profitable—especially with some of the smaller players, we'll see some shutdowns," he forecast.

Implementation is expected to cost billions of dollars, according to a study by the National Petroleum Council, the US energy secretary's oil and gas industry advisory panel (OGJ, July 17, 2000, p. 60).

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