NPRA: Refiners face 'difficult balancing act' in 2004

April 12, 2004
The US refining industry continues to deal with many challenges that are making it difficult to produce transportation fuels at the specifications and volumes that the market demands, according to Bob Slaughter, president of the National Petrochemical & Refiners Association.

The US refining industry continues to deal with many challenges that are making it difficult to produce transportation fuels at the specifications and volumes that the market demands, according to Bob Slaughter, president of the National Petrochemical & Refiners Association.

Speaking Mar. 21 at the 102nd NPRA annual meeting in San Antonio, Slaughter said the biggest issues that US refiners currently face include the new energy bill, a gasoline market that is experiencing high demand and prices, natural gas supply and pricing, and facility security.

"In 2004, the refining and petrochemical industries will continue a difficult balancing act because of higher feedstock costs, new regulations, and growing demand for petroleum and natural gas products," said NPRA Chairman Duane Gilliam, who retired as executive vice-president of Marathon Ashland Petroleum LLC.

"The situation is complicated further by uncertainty about crude oil supply and relatively high gasoline demand as refiners prepare to meet summer US gasoline specifications while making simultaneous changes in the fuel slate and meeting new environmental requirements," Gilliam said. "Despite these challenges, we remain confident that the refining and petrochemical industries will continue to do their absolute best to provide the public with adequate fuel supplies at affordable prices."

Natural gas concerns

Regarding natural gas, Slaughter noted that, "a very important issue for our petrochemical members is natural gas supply and price. Natural gas and natural gas liquids are an important feedstock for them."

Gilliam also stressed the importance of natural gas for refiners. "As refiners are required to make cleaner and cleaner fuelsUthey have to hydrogenate to lower-level sulfur," he said. "A great deal of that hydrogen generated by our member companies comes from natural gas. So natural gas is a very key component for our refinery and petrochemical members," he said.

To address the natural gas supply shortage, Gilliam suggested that offshore LNG sites should be permitted. However, he added, "We are finding the 'not in my backyard' principle. People seem to be reluctant to approve all the permits required for an LNG facility.

"Close behind that is increased exploration and production of natural gas. We need additional energy, in the forms of hydrogen, natural gas, and crude oil, but are we willing to allow the drilling and production?" Gilliam asked.

"We need to improve the resource base by allowing increased production of conventional natural gas supplies and preparing for additional use of LNG," Slaughter added. "We need to revisit some of the decisions we made not to produce conventional supplies of energy."

Bill Klesse, executive vice-president and chief operating officer for Valero Energy Corp., San Antonio, and NPRA chairman-elect, said conservation is a big part of the natural gas picture and that a three-pronged attack is needed: LNG, exploration, and the modernization of facilities.

Gasoline price run-up

Slaughter addressed the recent run-up in gasoline prices, saying that the major factors were crude supply and price and the demand for gasoline.

"Crude prices have been at high levels for most of the past year, and 50% of the manufacturer's cost to make gasoline and other petroleum products is crude cost," he said. "The refining industry in the US turned out a record amount of product in the past week. We are running at 90% capacity at a time when we are traditionally running at lower levels, because demand for gasoline is so high. And frankly, the reason is because the Amercian economy is recovering."

Slaughter continued, "There are some regulations and rules that have affected this switch away from [methyl tertiary butyl ether]—the bans that became effective at the beginning of this year in California, New York, and Connecticut. Essentially, MTBE had been 11% of the gasoline supply in reformulated gasoline areas. The good news is that those transitions [to ethanol] appear to be going fairly well."

Slaughter predicted, however, that refiners are going to be tested by "the switchover to summer fuel, which is going to be occurring over the next month or so. The industry has done everything it can to make that whole process move as smoothly as possible. But there is a significant incremental supply that has been changed from MTBE to ethanol, and there is an impact on overall supply and volume."

Klesse added that there are other factors that are reducing the gasoline supply.

"When we have policies that say you have to reduce the vapor pressure, then you have to take something out of the motor fuel pool," he said. "And you lose octane when you desulfurize. So we have to do something else like more severe reforming that shrinks the [gasoline] volume again. So you have all of these impacts from legislation that comes down without really any consideration of cost."

Gilliam said that the high operating rates that occur when refiners usually take units down for maintenance in preparation for the summer driving season "puts us on a tightrope as an industry."

Regarding the possibility of importing more gasoline from Europe, Slaughter said that "there are a number of [European and Latin American] refiners who are going to 'wait and see' how the market develops here [in the US] before they make investments."

When asked if NPRA would prefer a delay of the ultralow-sulfur diesel rule, Slaughter said that refiners are already making the investments to produce ultralow sulfur highway diesel in 2006 and would, therefore, prefer no delay in the implementation.

Gilliam added that because refiners are already building desulfurization capacity, they would prefer to start producing the clean diesel product in order to realize a return on the capital investment.

Slaughter said that, NPRA's public policy advocacy will continue to be active in 2004 on the important issues currently facing both industries— passage of comprehensive energy legislation with a limited MTBE liability provision, explaining and dealing with rising fuel prices, facility security concerns, regulatory requirements, and reform of the New Source Review program.