EIA: Refinery outages usually don't affect prices

Nick Snow
Washington Correspondent

WASHINGTON, DC, Apr. 3 -- A shutdown of any major refinery unit can reduce production of finished products. Integration of refinery units means that the outage of one can shut down or reduce operations at others. But refinery unit outages generally don't have a significant product price impact, said the US Energy Information Administration in a late March report.

"Prices are affected not by production changes alone, but mainly by the balance in supply and demand, as represented by inventory levels. If supplies are abundant relative to demand (e.g., high inventories and off-peak time of year), a refinery outage, even an unplanned outage, is likely to have little impact," the federal energy forecasting and analysis service said. It based this conclusion on its own monthly and weekly statistics, which it said can be analyzed for normal market variations and responses.

EIA quickly added, however, that while outages normally have little impact on prices, they can add to price pressure when markets are tight and alternative supply sources are not available.

"Clearly, the outages that occurred during Hurricanes Katrina and Rita were large enough to impact price. Another case was highlighted in an earlier report on California gasoline where several large unexpected outages in conjunction with tight gasoline markets seemed to drive up prices," it said. "However, outages with measurable impacts on monthly prices are relatively rare," EIA maintained.

Requested by Bingaman
EIA prepared the 53-page report, "Refinery Outages: Description and Potential Impact on Petroleum Product Prices," at the request of US Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-NM) when he was the chief minority member last July as the committee held a hearing on HR 5254, which aimed to increase domestic refinery construction.

"We have heard from several experts that the reason we are facing high prices at the pump stems from underlying supply issues. The amount of global excess capacity to produce oil and refine gasoline has been declining. Experts claim it has entered 'the red zone' and coupled with other threats to energy output (Nigeria, Venezuela, Iraq, and Iran), [a] perfect storm has been created," Bingaman said in his July 3, 2006 letter to US Energy Secretary Samuel W. Bodman.

Bingaman suggested that EIA's study include an examination of the preparations and execution of a refinery turnaround. He asked how refiners plan such maintenance, "including coordination of outside contractors," and if other refineries' known plans affected scheduling. He also asked how much flexibility refiners have in changing their planned activities, and inquired about the extent to which reliability and safety prohibit deferring maintenance.

In its report, EIA noted that turnarounds are the biggest planned outages at refineries because they involve major maintenance and overhauls. Safety is a major concern while they are in effect because refineries run with materials at high temperatures and high pressures, and some of the materials are caustic or toxic and must be handled appropriately, it said.

"The frequency of major turnarounds varies by type of unit, but may only need to be done every 3-5 years on any given unit. Planned turnarounds often require 1-2 years of planning and preparation to organize, line up the skilled labor, and arrange for the materials and equipment." The actual turnaround may then last 20-60 days, the report said.

A refinery turnaround's size and complexity leaves little flexibility for changing plans, even when market conditions favor leaving the refinery running, EIA continued. A major fluid catalytic cracking turnaround might require increasing outside labor by more than three times the labor force usually present in the refinery, and long lead times are needed for some materials and equipment, it indicated.

Labor shortage
Another important factor is that skilled labor for turnarounds is in short supply, preventing refiners from conducting simultaneous turnarounds, EIA's report said.

Citing a recent survey of operating experiences for 28 FCC units by the newsletter Octane Week, it said that while 22 of the units targeted 4-5 years between turnarounds, only 16 stayed on that schedule. "Turnaround times also tended to be longer than planned, with the average slippage being 5 days. Some companies indicated that in recent years, the slippages were the result of a lack of skilled labor, creating the need for longer outages," EIA's report said.

Such planned maintenance normally occurs during the first and fourth quarters of each year since this normally is the time when product demand is seasonably low and weather conditions are favorable, it said.

"Unplanned outages can be very disruptive since they allow for little, if any, lead time to plan for the shutdown. Some unplanned outages can be postponed for several weeks while material, equipment, and labor are ordered. Others may require immediate shutdowns," the report continued.

Volumes lost from an unplanned outage are usually less than from planned turnarounds, but unplanned outages can occur during high demand periods when markets are more sensitive to lost barrels of product, it said.

In the California situation, which it reviewed in an earlier report, EIA said that one or more large outages occurred during a peak demand period in an area where alternative supplies were not available, which significantly affected prices.

Spring, when refiners are switching from winter to summer gasoline grades, can be another vulnerable period, it continued. Prices can be initially depressed as suppliers draw down their winter-grade gasoline, which cannot be used during summer months, while they produce and store their summer-grade motor fuel. Prices then increase seasonally as the summer-grade gasoline season begins and demand rises toward its summer peak.

If refineries are slow to ramp up summer-grade gasoline production because they are having difficulty coming back from turnarounds, extra price pressure can occur, EIA said in its latest report. "This was the case in the spring of 2006, when a number of refineries were still trying to recover from the hurricanes in fall 2005. While gasoline imports increased to offset some of the refinery supply loss, the volumes of affected capacity were unusual," it said.

Contact Nick Snow at nsnow@cox.net.

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