NPRA: ConocoPhillips CEO Mulva has great expectations for refining industry

David Nakamura
Refining/Petrochemical Editor

SAN ANTONIO, Mar. 27 -- ConocoPhillips "has great expectations for the refining industry, despite the great demands we face this year and in the years to come," company Pres. and CEO James J. Mulva told attendees at the National Petrochemical & Refiners Association's 101st annual meeting here Tuesday.

According to Mulva, refiners will face a number of challenges in the next few years, including:
-- Sustaining profitability in an economy that lacks direction.
-- Meeting clean-fuel requirements.
-- Restoring balance to the natural gas market to ensure reasonable prices and reliable supply.
-- Protecting the refining industry's infrastructure from acts of terrorism.

Sustaining profitability
Refiners had disappointing financial results in 2002, Mulva noted.

"The weak economy, an unusually warm 2001-02 winter, and the dramatic reduction in air travel cut demand for all petroleum products except gasoline," he said. "Exceptionally high (US) gasoline imports tended to dampen prices through most of the year. (Organization of Petroleum Exporting Countries) production cutbacks disproportionately reduced heavy-crude imports, shrinking the cost advantage of heavy over light crudes, which hurt upgrading margins for some refiners."

First quarter 2003 saw an improvement in US refining margins because gasoline demand remained strong, and the unusually cold winter in the Northeast and Midwest created extremely high demand for distillate and other fuels.

"But the first quarter is not a bellwether for the rest of the year," Mulva cautioned. "Special circumstances, not structural improvement, have been driving the market. And that will continue to be the case until there's a positive change in underlying demand. Much depends on the direction of the US economy this year and next."

Mulva agrees with US Department of Energy estimates that US gasoline demand will grow 2-3%/year in 2003-04. Gasoline supplies should remain tight in 2003 due to mandatory clean-fuel reformulations and the changing oxygenate situation. These same factors could inhibit gasoline imports.

"Longer term, US refiners need to be concerned about the surplus of gasoline capacity that is building in Europe as tax policies shift consumer demand toward diesel," Mulva said. "Excess gasoline production will drive distressed product into the world market, with much of it ending up in the US. This trend could put pressure on domestic margins."

Clean-fuel requirements
Mulva reported that ConocoPhillips will spend nearly $1 billion for clean-fuel investments, but that more capital might be needed.

"The heat is on for more improvements," he said. "Within the next 12 months, US gasoline sulfur standards begin phasing-in. These restrictions will be followed by federal mandates for reduced sulfur in diesel fuels, which will reach ultralow levels in 2006."

Some states and localities could initiate additional mandates, which could further complicate delivery issues and supply liquidity.

"To avoid the multiplicity of requirements and provide some certainty of direction, ConocoPhillips believes a federal solution to the (methyl tertiary butyle ether) phasedown is appropriate," Mulva said. "A federal approach, when coupled with removal of the RFG (reformulated gasoline) oxygen mandate, will eliminate the growing 'patchwork problem' and allow our industry to fully optimize production and delivery systems.

"We must continue to push hard for clean-fuel and clean-vehicle solutions based on sound science, reasonable timetables, and effective technologies," he said. "Our industry must continue to advocate and invest in innovative solutions."

Restoring gas price stability
Mulva noted that ConocoPhillips is a major consumer and supplier of natural gas. Rising gas prices and uncertain supplies are a major worry to his company and the refining industry.

"On the demand side, most of the new electric generation capacity coming on stream over the next few years will be fired by natural gas," Mulva said. "On the supply side, domestic gas production is going nowhere, at least for now. Even though the sluggish economy dampened demand for gas in 2002, the decline in domestic production was even greater, some experts say up to 5%."

Some longer-term solutions could bring price stability and supply reliability. According to Mulva, Alaska's North Slope has at least 35 tcf of proven gas reserves, waiting for pipeline transportation to the Lower 48. A new gas pipeline delivering 1.5 tcf/year to the US would represent about 6% of domestic gas production in 2012.

"I know 2012 sounds like a long way off," Mulva said. "But no other single factor could do more to restore stability to the US gas market. Waiting to be reintroduced in the US Senate this session is a bill that would help pave the way for private investment in a pipeline from the North Slope into the upper Midwest."

Bolstering facility security
For one of its facilities, ConocoPhillips authorized $5 million in additional safeguards to enhance security, Mulva said.

He reported that government and industry must work together to assess and manage the threats of terrorism.

"We fully recognize the importance of appropriate third-party assessments, but a coordinated approach is essential," Mulva said. "Separate visits by multiple authorities, each with individual evaluation processes, waste resources and consume time that could otherwise be devoted to developing security solutions."

"Several companies, trade associations, and key government agencies are developing an assessment methodology specifically tailored for refineries and terminals.

"What's not needed from government is a detailed rule book saying what every refinery, pipeline, terminal, or chemical plant must do to become more secure," he said. "We know from much experience that inflexible, legislated standards snuff out innovative ideas, are more expensive to implement, and are cumbersome to live with."

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