Processing: Refining focus swings from clean fuels to adding capacity

Jan. 1, 2007
Refiners throughout the world will turn their focus in 2007 to expanding crude distillation capacity and expanding the use of renewable fuels.

Refiners throughout the world will turn their focus in 2007 to expanding crude distillation capacity and expanding the use of renewable fuels. Last year, refiners, especially in the US, concentrated their efforts and capital spending on units for the production of clean fuels.

Any free capital will now go into projects to expand distillation capacity or to add coking or hydrocracking capacity, which will allow refiners to run heavier and less-expensive crudes.

Outside the US, refiners will be concerned with maintaining enough production to keep up with demand, which is growing very quickly in some regions, especially China and India. Other areas, such as the Middle East, are adding capacity to export gasoline and other products.

For the third year running, refiners enjoyed healthy margins in 2006. There is no reason for this to change in 2007 because the supply-demand balance for refined products should again be very tight. Refiners added very little net capacity in 2006, as OGJ reported in its recent Worldwide Refining Survey (OGJ, Dec. 18, 2006, p. 56).

The survey showed only 52,000 b/cd of additional capacity. And for the second year in a row, no grassroots distillation capacity started up. All of the new capacity was due to expansions of existing facilities.

Product demand is expected to continue to outpace capacity growth for the immediate future. The only short-term solutions will be for refiners to raise utilization rates, which already are historically high, or use lighter, more expensive crudes to produce more gasoline.

Because of this tightness, any disruption in the refining industry could produce very high gasoline or diesel prices, or actual short-term shortages. In 2006, no major hurricanes hit the US Gulf Coast, although the area is thought to be in an active hurricane phase.

By 2010, the US should add about 1.1 million b/d of crude distillation capacity. This year, however, little additional capacity is slated to start up.

In June 2006 or earlier, nearly all US refiners started producing ultralow-sulfur diesel, which can contain no more than 15 ppm sulfur at the point of retail sale. Terminals had ULSD by Sept. 1 and retailers by Oct. 15.

Concerns remain that the new emission-control technology in large diesel engines will not tolerate the 500-ppm low-sulfur diesel remaining in the market, so any upsets in the fuel-supply system could damage the trucking industry.

Most pipelines require ULSD at 8 ppm sulfur at the refinery gate, a standard most refiners can meet. But consistent diesel-price strength relative to gasoline indicates a market straining for supply.

Compounding the effects of ULSD implementation is the fact that refiners now must add ethanol to gasoline. In 2006, US refiners were required to use 4 billion gal of the renewable fuel. In 2007, the amount rises to 4.7 billion gal.

Demand for ethanol currently exceeds capacity to produce the fuel, requiring substantial levels of imports. Recently, ethanol spot prices hit a 3-month high of $2.50/gal, which is 80¢/gal more than wholesale gasoline. During the summer of 2006, spot prices hit $3.35/gal for ethanol. According to analysts at Friedman, Billings, Ramsey & Co., imports are economic above $2.35/gal.

Because ethanol is not transportable with gasoline via pipeline, as was the previously used oxygenate, methyl tertiary butyl ether, refiners must use different methods to move it to terminals. Instead of pipelines, suppliers use trucks and railway cars-trucks that are required to use ULSD. A shortage of ULSD, therefore, has the potential to decrease ethanol deliveries. And because gasoline made for ethanol blending is unusable by itself, any such diesel disruption would become a problem for gasoline supply as well.