US refining capacity, product demand not rising in step

By OGJ editors
HOUSTON, Aug. 18 -- US refining capacity has not kept up with increasing demand for petroleum products. Some within the industry view this decline as being driven by fundamental refining trends as well as the globalization of product trading.

This view, however, "holds that the US refining capacity situation is the inevitable result of a global market for petroleum products, as well as the decline in domestic crude production," according to a report released Tuesday by New York-based Petroleum Industry Research Foundation Inc. (PIRINC) entitled, Refining Capacity: Challenges and Opportunities Facing the US Industry.

Although released by PIRINC, the report was prepared by energy policy specialists from the Congressional Research Service (CRS) of the Library of Congress. PIRINC Pres. Larry Goldstein said, "The views of the authors are not necessarily those of PIRINC. PIRINC believes, however, that the report makes an important contribution to the national energy policy dialogue."

The report went on to say, "Those concerned about the adequacy of US refining capacity point to parameters that governments could change, were a concerted and comprehensive refining policy to be formulated."

Those with this viewpoint "see environmental policies that fracture the gasoline market and adversely affect efforts aimed at modernizing of physical plant," the report said. "Additional concerns exist about other factors that could impact profitability, such as [methyl tertiary butyl ether] lawsuits. These factors may be restricting refining investment decisions."

Environmental impacts
Changes in regulatory practices and legislative action are seen "as effective tools to improve the outlook for refining. Some seek remedies by changing environmentally related regulation," the report said.

"The complexity of the environmental aspects of the refining business is reflected in the complexity of the government-industry interactions. Despite the focus on changing federal rules and regulations, much environmental regulation occurs at the state and local levels," the report said.

A change in federal rules, however, "does not necessary translate into changes at the state and local levels, and certainly not uniformly," the report noted, adding that the successful blockage of the US Environmental Protection Agency's proposed routine maintenance rule was "initiated by 12 states and several major cities."

State, local roles
Likewise, the report continued, state and local decisions have added to the proliferation of boutique fuels and MTBE lawsuits, "not edicts of the federal government." The report said, "Attempts to streamline governmental decision-making with respect to environmental impact are far more complex than simply changing some federal rule."

States and local communities, the report said, "need to see that the advantages industry is claiming as a result of such actions will lead to important improvements in the nation's petroleum products situation. "Such promises are not easily made. Like government, the industry is not homogeneous. Individual companies have different business plans and different investment opportunities," it said.

Some refiners, such as San Antonio-based Valero Corp., focus on US refining in general, and specifically on upgrading existing refineries. "Improvements in the regulatory climate may provide significant encouragement of its core business," the report said.

Meanwhile, others such as ExxonMobil Corp. focus their interests on a more global level. "Improvements in the US regulatory climate will have to compete with the regulatory and economic climate of other countries for its investment dollar," the report noted.

"To make it attractive for US refiners to expand, clear and durable policy is critical. If the policy goal is really focused on reviving and expanding domestic refining capacity, the focus must be long-term, and—given the realities discussed in this [report] —more complex," the report said.

A comprehensive approach to refining policy, therefore, would be required to meet the economic and regulatory challenge of rehabilitating existing US facilities—"not to mention constructing new ones," the report said.

PIRINC comments
Goldstein said, "US refiners are currently enjoying high margins thanks to both global and domestic factors. Within the US, refiners are running flat out in the face of strong demand."

Moreover, strong global demand for products outside the US combined with the impact of more stringent US product specifications has "made it more expensive to shop the global market to fill the growing gap between [US] market requirements and [US] refining capacity," Goldstein said.

The year, according to US Energy Information Administration estimates, net product imports will meet about 9% of US oil demand, which is up from 7% in 2000 and more than double the 4% share in 1995, Goldstein noted. "Gasoline, including blending components, currently accounts for over 35% of total imports and about 10% of total US gasoline supplies," he said.

"Other things equal, the combination of favorable margins, strong demand, [and] extremely high utilization rates creates strong incentives to invest in additional capacity—provided such conditions are expected to continue, or at least not revert to those that have made refining a marginally profitable business for so many years," Goldstein said.

Goldstein noted that in requesting NPC to produce a report about the US refining and distribution industry's ability to meet future demand, US Sec. of Energy Spencer Abraham "has recognized the importance of adequate domestic refining capacity to the health of the US economy."

Abraham said that, ". . .constraints on refinery expansion coupled with an effective moratorium on new construction since 1976 have resulted in our dependence on a system running at an average 96% utilization rate for the summer of 2004."

Goldstein concluded, "Over the past 2 decades the US economy has been slowly insulating itself from oil price shocks. But while we have insulated ourselves, we are not immune.

"The sudden run up in oil prices is having a negative impact on the US and the global economies. It has probably reduced second and third quarter [gross domestic product] by 0.5% from what otherwise would have been the case.

"For most of the past 20 years, there was widespread global spare crude oil productive capacity, widely distributed spare refining capacity, and significant discretionary product inventories. Today these three cushions or shock absorbers are greatly diminished.

"The loss of these cushions has made price volatility the 'norm' in the oil sector and has created an asymmetric bias toward the upside. Without these cushions, price is the only variable left to clear markets.

"The 'problems' in the energy sector have been 2 decades in the making and it will clearly take more than 2 weeks, 2 months, and even 2 years to correct," he said.

Related Articles

ExxonMobil outlines 2014 production plans

03/05/2014

ExxonMobil Corp. said it expects to start production at 10 major projects this year, adding 300,000 net boe/d of net capacity.

ExxonMobil starts production from Damar gas field offshore Malaysia

02/14/2014 ExxonMobil Exploration & Production Malaysia Inc. reported the startup of natural gas production from Damar field, which lies in 55 m of water ...

ExxonMobil expands Permian acreage, enters Utica agreement

02/03/2014 XTO Energy Inc., a subsidiary of ExxonMobil Corp., has agreed to fund development to gain operating equity in 34,000 gross acres in the liquids-ric...

Old onshore concession ends in Abu Dhabi

01/22/2014 Abu Dhabi National Oil Co. (ADNOC) has become the sole shareholder of Abu Dhabi Co. for Onshore Oil Operations (ADCO) after the expiration this mon...

Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected