US refiners will need to supply motorists with increasingly clean fuels produced from increasingly sour crude oil, and it won’t be easy, experts warned during an US Energy Information Administration conference Apr. 12 in Washington, DC.
“There are alternatives. Unfortunately, all require substantial capital,” said William Brown, an operations research analyst in EIA’s integrated analysis and forecasting office. Brown spoke during a session on adapting US refineries to meet marketing challenges at EIA’s 2005 Midterm Energy Outlook and Modeling conference.
The problem is not so much a shortage of crude oil as an increasingly sour slate, suggested Jay Saunders, vice-president of oil and gas equity research at Deutsche Bank Securities Inc. in Baltimore. “We have plenty of crude around, but more of it is heavy than before,” he said.
“The real problem is not the gravity, but the sulfur content. There’s been more investment to improve the quality of each barrel of product than to increase capacity,” Saunders noted.
Saunders said that he forecast a $14 spread between West Texas Intermediate and Maya crude oil prices for the first quarter. It actually was closer to $17.
“With underinvested US refining needing sweeter crudes, an increasingly sour slate widens the differentials further,” Saunders said, noting that European light product demand during 2005’s first 3 months reduced US distillate availability because there were fewer imports possible.
“Increasingly, we have to look at what’s going on in the United States in the world’s context,” he said. “During the first quarter, we got a little over 300,000 b/d of distillate imports. In even mild weather, we need around 500,000 b/d.”
Michael Leister, fuels technology manager at Marathon Ashland Petroleum LLC, predicted that imports would be the primary alternative in meeting growing US oil product demand. “They’re very flexible. They can be easily diverted in response to economics,” he observed.
US product distribution is so sophisticated that shortages in the US Midwest can be met with increased imports on the East and Gulf coasts, he continued. “Product can move east, west, north, or south across most of the country,” Leister said.
Long-term import availability offers a more economic alternative to constructing new refineries or expanding existing plants, he added. “Caribbean and European refineries have made investments to produce Tier II gasoline,” he said. “Whether that will happen with ultralow-sulfur diesel fuel is less certain. Overseas refiners could wait for a shortage to appear before moving ahead.”
Saunders said that refiners apparently have started to increase their stocks. “My sense is that they’re backing away from just-in-time inventories that were popular a few years ago and are building stocks as insurance against price spikes,” he said.
But he also said it will take time for US refiners to increase capacity if it’s needed. “It takes at least 2 years and roughly $10 million/1,000 bbl to add coking capacity,” Saunders said. Such refining investments have slowed down because of onerous near-term clean fuel requirements, he added.
One positive development, said Leister, is that refining continues to grow more efficient. “There certainly has been a trend for US refining to be shut down, yet capacity has grown,” he said. “That means that other refineries have grown more economic. Further expansion would make more sense than restarting a closed, less-efficient refinery. Constructing a grassroots refinery is 3-4 times more expensive than expanding an existing plant.”
Brown concluded, “Refiners are faced with major challenges. Fortunately, there are solutions. Unfortunately, all of them will be costly.” ✦
