Refiners pull back on capacity additions, EIA chief says

Nick Snow
Washington Correspondent

WASHINGTON, DC, May 15 -- US refiners apparently have scaled back plans for additional capacity from levels of a year ago, the head of the US Energy Information Administration told a Senate committee on May 15.

Unexpectedly higher costs for the additions and uncertainty created by growing discussions of alternative energy sources are the primary reasons, EIA Administrator Guy Caruso told the US Senate Energy and Natural Resources Committee.

Caruso said a member of his staff noticed the difference after informally surveying refiners at the National Petrochemical & Refiners Association's 2006 and 2007 annual meetings.

The staff member, senior analyst Joanne Shore, told reporters following the hearing that EIA also monitors refiners' financial results and their statements to financial analysts. "We saw some projects pulled back or delayed due to sharp increases in costs and uncertainties due to alternative fuels," she said.

Shore said one of the biggest reductions in plans to add capacity came from Valero Energy Corp., the nation's largest independent refiner and marketer. "It had very aggressive plans in 2006," Shore said.

Via phone from Valero's headquarters in San Antonio, spokesman Bill Day said higher costs and a shortage of labor have made the company delay some projects. But it just completed one that expanded capacity at its Port Arthur, Tex., refinery to 325,000 b/d, and it is tentatively considering another that would cost $1 billion to raise capacity there to 400,000 b/d, he told OGJ.

'Starving investment'
Caruso's comment led committee member Ron Wyden (D-Ore.) to observe, "We've seen starving investment and record profits in refining the past few years."

A second witness, Paul Sankey, said, "Even with all the uncertainty, there's still tremendous investment, particularly in capacity to upgrade and process heavier crudes." Sankey is managing director of Deutsche Bank AG's oil equity research team in New York.

Their comments and testimony came as the committee held its annual hearing on the summer oil and gasoline outlook. But it came as many members of the 110th Congress expressed concern over recent gasoline price increases.

In his opening statement, Chairman Jeff Bingaman (D-NM) said he called the hearing because gasoline prices have reached historic highs. "Yesterday, the [EIA] posted the highest-ever price for gasoline, at a nationwide average of $3.10/gal. This is the third summer in a row that we are having this discussion about why prices are at record levels," he said.

Chief minority member Pete V. Domenici said while rising gasoline prices frequently bring heightened scrutiny and accusations of manipulation, the main culprit is increased global demand coupled with reduced supplies. "Unfortunately, this particular hearing has become as predictable as the cherry blossoms here in Washington. We may not know exactly when, but you can bet that in the late spring, this committee will hold a hearing to talk about gas prices," he said.

"I don't think there's a free market here at all," said committee member Byron L. Dorgan (D-ND). "You've got [the Organization of Petroleum Exporting Countries] trying to restrict production. You've got major oil companies, which are stronger through mergers. And you have refining, where ownership is highly concentrated."

Robert Menendez (D-NJ), another committee member, said, "This is the third year in a row that consumers are facing prices above $3/gal, yet there's been no event like a hurricane or a major refinery outage to cause it."

Lingering outages
But Caruso said US gasoline production was affected more than usual by refinery outages this spring, which extended past the first quarter into May. That, combined with low imports and seasonally rising gasoline demand, made inventories drop sharply to 193 million bbl by the end of April, more than 14 million bbl less than a year earlier and 12 million bbl less than the lower end of the typical range for this time of year, he told the committee.

"During April, EIA estimated that refinery outages may have reduced gasoline production by 150,000 b/d over average outages for that period. Refinery throughputs have just begun to show the seasonal increase typical at this time and are expected to increase over the next several months, which should ease pressure on gasoline prices," Caruso said in his written statement.

EIA expects average US prices for regular grade gasoline to grow from $2.24/gal in January to $3.01/gal in May. This could ease slightly during the summer before returning to May's level as Labor Day approaches, the EIA administrator said. The price through the summer driving season is a projected $2.95/gal, 11¢ higher than the comparable 2006 period's average, he added.

Sankey added that two of the nation's five largest refineries—both owned by BP PLC—are running at 50% of their usual capacity for safety reasons. The plants in Texas City, Tex., and Whiting, Ind., are producing 400,000 b/d less than usual, with the remainder "operating suboptimally, running rate light, sweet crude when they should be using more abundant heavy, sour grades," he said in his written testimony.

The Deutsche Bank analyst also said years of reduced refining investment have led to a lack of qualified engineering procurement and construction staff. "One vital issue here is that the tightness of US refining capacity at this time is not because companies are unwilling to invest in more capacity, it is that they are unable to. There is competition from nonrefining investment to exacerbate the problem, notably in Canadian heavy oil sands," he said.

Kevin J. Lindemer, executive managing director of Global Insight in Lexington, Mass., told the committee that a smooth transition from current low inventories and extended maintenance to full production in the next several weeks could bring gasoline prices down to a nationwide average of $2.75/gal by the end of the summer.

"However, the system remains extremely vulnerable to disruptions and events. The risk of higher prices at the retail level comes from refining operations and the global crude market. Further events that increase supply concerns materially could drive average gasoline prices to the $3.25 range by the end of summer," he said.

Minimum inventories
Geoff Sundstrom, public affairs director for AAA, said the motorist organization believes Congress and the administration of President George W. Bush should explore measures that would require refiners to maintain a minimum level of gasoline and other product inventories.

"Such a system exists in Europe and was able to provide critical gasoline to the US during production shortfalls that occurred following the 2005 hurricanes. Should similar or worse disasters occur in the future, our ability to immediately move gasoline to areas that need it will again be critical," he said.

When Bingaman asked if refiners could be required to report planned outages to the federal government, Caruso said it would be difficult to manage. "Even in planned outages, they may find the problem is more extensive than they anticipated. So even if they did report, I don't know if we'd have enough information to say whether they should proceed or wait," the EIA administrator said.

Sankey also was skeptical of calls by some federal lawmakers to give the Federal Trade Commission authority to investigate oil product price manipulation allegations. "We believe there have been enough investigations by Republicans and Democrats to show that there's no price-gouging taking place nationwide. There may be some rogues doing it regionally. But the fact is that refiners are making so much money legitimately that they don't need to do it," he said.

"There's also great concern that all these gasoline investigations which are being proposed will lead to regulations which would make new investments uneconomic," Sankey added.

When Wyden and some other committee members asked why more investments haven't been made in refining with profits so high the past few years, the Deutsche Bank analyst said that the past 3 years of strong earnings followed about 3 decades of miserable results.

"If you look at how the stock market values refiners, they are still among the cheapest investments at about 5 times earnings. It's obvious that investors believe economically attractive refining conditions aren't permanent," Sankey said.

Contact Nick Snow at nsnow@cox.net.

Related Articles

India’s IOC to invest in processing-related upgrades, expansions

02/19/2015 Indian Oil Corp. Ltd. (IOC) has approved a series of expansions and upgrades designed to improve fuel quality and production at several of its refi...

PwC: Chemicals industry M&A activity in 2014 reached 10-year high

02/19/2015 Mergers and acquisitions (M&A) activity in the US chemicals business ramped up substantially in 2014, recording the highest volume in a decade ...

ExxonMobil investigating explosion at Torrance refinery

02/19/2015 An investigation is under way into the cause of an explosion and ensuing fire that took place at ExxonMobil Corp.’s 149,500-b/d Torrance, Calif., r...

Pemex lets contract for Salamanca refinery amid budget cuts

02/18/2015 Mexico’s Petroleos Mexicanos (Pemex), through a contractor, has let a contract to SENER Ingeniería y Sistemas SA, Mexico City, a division of SENER ...

Uganda taps Russian firm to build country’s first refinery

02/17/2015 The government of Uganda has selected a consortium led by Russia’s RT Global Resources, Moscow, as its first choice to construct the country’s firs...

Indian state, Kuwaiti firm sign deal for refinery, petchem complex

02/16/2015 The government of India’s Andhra Pradesh state has entered an agreement with Al Qebla Al Watya Inc., a subsidiary of Mohammed Abdulmohsin Al-Kharaf...

Lukoil lets contract for Uzbekistan gas processing plant

02/13/2015 Russia’s OAO Lukoil has let a contract to a consortium headed by South Korea’s Hyundai Engineering Co. Ltd., Seoul, for the construction of its lon...

Mangalore refinery reports steady operations following expansion

02/13/2015 Operations are proceeding smoothly at Mangalore Refinery & Petrochemicals Ltd.’s (MRPL) refinery in Mangalore, India, following the recent comp...

Omsk refinery hits target for Euro 5 diesel output

02/12/2015 JSC Gazprom Neft has switched to the exclusive production of Euro 5-standard diesel fuels at its 21.4 million-tonne/year Omsk refinery in Western S...
White Papers

AVEVA’s Digital Asset Approach - Defining a new era of collaboration in capital projects and asset operations

There is constant, intensive change in the capital projects and asset life cycle management. New chall...
Sponsored by

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by

Squeezing the Green: How to Cut Petroleum Downstream Costs and Optimize Processing Efficiencies with Enterprise Project Portfolio Management Solutions

As the downstream petroleum industry grapples with change in every sector and at every level, includin...
Sponsored by

7 Steps to Improve Oil & Gas Asset Decommissioning

Global competition and volatile markets are creating a challenging business climate for project based ...
Sponsored by

The impact of aging infrastructure in process manufacturing industries

Process manufacturing companies in the oil and gas, utilities, chemicals and natural resource industri...
Sponsored by

What is System Level Thermo-Fluid Analysis?

This paper will explain some of the fundamentals of System Level Thermo-Fluid Analysis and demonstrate...

Accurate Thermo-Fluid Simulation in Real Time Environments

The crux of any task undertaken in System Level Thermo-Fluid Analysis is striking a balance between ti...
Available Webcasts


Prevention, Detection and Mitigation of pipeline leaks in the modern world

When Thu, Apr 30, 2015

Preventing, detecting and mitigating leaks or commodity releases from pipelines are a top priority for all pipeline companies. This presentation will look at various aspects related to preventing, detecting and mitigating pipeline commodity releases from a generic and conceptual point of view, while at the same time look at the variety of offerings available from Schneider Electric to meet some of the requirements associated with pipeline integrity management. 

register:WEBCAST



On Demand

Global LNG: Adjusting to New Realities

Fri, Mar 20, 2015

Oil & Gas Journal’s March 20, 2015, webcast will look at how global LNG trade will be affected over the next 12-24 months by falling crude oil prices and changing patterns and pressures of demand. Will US LNG production play a role in balancing markets? Or will it add to a growing global oversupply of LNG for markets remote from easier natural gas supply? Will new buyers with marginal credit, smaller requirements, or great need for flexibility begin to look attractive to suppliers? How will high-cost, mega-projects in Australia respond to new construction cost trends?

register:WEBCAST


US Midstream at a Crossroads

Fri, Mar 6, 2015

Oil & Gas Journal’s Mar. 6, 2015, webcast will focus on US midstream companies at an inflection point in their development in response to more than 6 years shale oil and gas production growth. Major infrastructure—gas plants, gathering systems, and takeaway pipelines—have been built. Major fractionation hubs have expanded. Given the radically changed pricing environment since mid-2014, where do processors go from here? What is the fate of large projects caught in mid-development? How to producers and processors cooperate to ensure a sustainable and profitable future? This event will serve to set the discussion table for the annual GPA Convention in San Antonio, Apr. 13-16, 2015.

This event is sponsored by Leidos Engineering.

register:WEBCAST


The Future of US Refining

Fri, Feb 6, 2015

Oil & Gas Journal’s Feb. 6, 2015, webcast will focus on the future of US refining as various forces this year conspire to pull the industry in different directions. Lower oil prices generally reduce feedstock costs, but they have also lowered refiners’ returns, as 2015 begins with refined products priced at lows not seen in years. If lower per-barrel crude prices dampen production of lighter crudes among shale plays, what will happen to refiners’ plans to export more barrels of lighter crudes? And as always, refiners will be affected by government regulations, particularly those that suppress demand, increase costs, or limit access to markets or supply.

register:WEBCAST


Emerson Micro Motion Videos

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