Capital spending on clean-fuels projects by US independent refiners will peak this year, according to an analysis by investment banker Friedman, Billings, Ramsey & Co. Inc., Arlington, Va.
“Although many refiners have upgraded their facilities to meet the low-sulfur gasoline standards that started last year, some were given extensions (small-refiner benefit, corporate pool averaging, etc.) and are just beginning the projects,” FBR analyst Jacques Rousseau said.
“We expect these capital expenditures to decline in 2006 but still remain material and then significantly fall off in 2007,” he said in an Apr. 6 research note.
Refiners are upgrading facilities to satisfy low-sulfur standards for gasoline and diesel.
For example, Valero Energy Corp., San Antonio, plans to spend more than $600 million on clean fuels-related projects this year, Rousseau said.
Others agree that mandated reductions in product sulfur levels are the most significant factors in refiners’ spending plans. Fuel regulations are changing in the US, Europe, Asia, and Latin America.
According to Scott Sayles, principal consultant for KBC Advanced Technologies Inc., Houston, US investment costs will total $8 billion for ultralow-sulfur gasoline and could reach $9-15 billion for ultralow-sulfur diesel (OGJ, Oct. 18, 2004, p. 48).
High product demand
FBR’s Rousseau noted that strong demand for US oil products continues, with first quarter consumption 2.8% higher than in the same period a year ago.
“While some of the gains in implied demand may be due to the exporting of diesel fuel to Europe, gasoline consumption is also strong (+1.9%) despite the high retail prices. As a result, although production is at record levels, refined product inventory levels are only 3% higher than last year,” he said.
Near-record refining margins are prompting higher US refinery utilization rates.
“This could result in inventories rising in the coming weeks, ahead of the typically late April-May building of gasoline stocks for the summer driving season. We do expect positive momentum in the sector to continue in the near term,” Rousseau said. ✦
