Refiners are likely to shut down about 1.5 million b/d of capacity because of U.S. clean air legislation, Wright Killen & Co., Houston, estimates.
In the worst case possible, Wright Killen says, only about 41 U.S. refineries have closed or are at risk of closing, with most capacity likely to be lost in Petroleum Administration for Defense (PAD) Dist. 5. Regional refining capacities in PADs 1 and 4 will be affected least.
Wright Killen derived its conclusions from external and internal analyses of U.S. refineries organized into 18 strategic regions in which the plants compete for feedstock and product markets.
"For every refinery that has shut down as a result of clean air legislation, several more are weighing the advantages and disadvantages of shutting down," said L.T. Hawthorne, Wright Killen manager of strategy and business analysis.
Capital costs of complying with environmental rules are plant specific and can vary widely. They depend on things like location, work practices, remediation efforts, residual hazardous materials, and hydrogeological factors. Hawthorne said remediation and plant cleanup costs for a typical refinery can amount to $50-100 million.
A refiner's cost of staying in business can easily equal costs of shutting down. A refiner who believes his shutdown costs exceed the cost of staying in business likely will persevere if expected refining margins appear capable of generating enough money to service debt.
"Some refiners will choose to continue operating despite concern about the profitability of their facilities rather than face potentially enormous site closure costs associated with environmental remediation and plant clean out," Wright Killen said.
ANALYTIC DETAILS
Wright Killen's external analysis identified from lists of company specific and refinery specific factors 14 criteria that most affect survival of refineries.
Factors applicable to all refineries within a given company include degree of upstream and downstream integration, debt to equity ratios, total number of plants, and total refining capacity. Factors specific to individual refineries include crude oil and product logistics, sweet and sour crude processing capacities, process and conversion complexity, capability of producing reformulated gasoline and low sulfur diesel fuel, and investment history.
For the internal analysis, Wright Killen used the company and refinery specific criteria to evaluate each refinery. Evaluations were quantified on the basis of three indexes for company, refinery, and survivability. Each was weighted to reflect Wright Killen's opinion of the relative importance of each facility within its strategic regional group.
Each refinery then was placed in one of three categories based on its calculated survivability index: those most likely to fail, those at risk, and those expected to survive.
SUBJECTIVE ASSESSMENT
Wright Killen compared the survivability index value calculated for each plant with subjective assessments of a refinery's future operating potential based on factors that resist numeric quantification: nonrefining business integration, reputation and image, unique exit barriers, specialty products, and manufacturing system integration.
In addition to 18 refineries with combined crude charge capacity of 675,000 b/d that have recently closed, Wright Killen concluded 10 refineries with combined crude charge capacity of 220,000 b/d are likely to fail, and 13 with combined capacity of 570,000 b/d are at risk.
To close a marginal plant, a major refiner with multiple plant sites has the flexibility to use revenue from other plants to help pay for closing costs. Combined with a relatively strong balance sheet, such flexibility would allow the refiner to make a strategic decision.
But for many independent refiners-especially small companies with only one refinery or a narrow portfolio of products-the decision about whether to shut down will be based on financial factors rather than strategic alternatives. Without the option of making selective investments, independents that lack money to meet investment needs likely will have to shut down.
"In this event, bankruptcy might be the only alternative, with payment for the clean up eventually assumed by the Superfund," Wright Killen said.
Hawthorne said U.S. refiners are becoming increasingly sensitized to economic and financial factors affecting environmental compliance or plant shutdown costs. At this point, assessing the nature and extent of industry reactions to clean air requirements is little more than a wait and see exercise.
"The pivotal question is which refiners appear to have adequate staying power and which are most likely to shut down first," he said.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
