Bob Tippee
Good times lie ahead for US refiners. But there's a catch: Only survivors will enjoy them.
Another catch: Fuel consumers won't like what's in store for prices of gasoline and diesel.
"All of the positive implications of the low-sulfur regulations on the US refining industry involve losses of supply to US consumers and the positive effect on refining margins," says Fitch Ratings analyst Bryan Caviness.
Compliance deadlines loom for new transport-fuel sulfur specifications.
Sulfur in gasoline has to fall from 300 ppm now to 120 ppm in 2004 and 30 ppm in 2006.
In highway diesel, sulfur has to plummet from 500 ppm to 15 ppm by 2006. The sulfur content of offroad diesel probably will drop, too, only later.
To meet the new specifications, refiners have to make hefty investments that won't generate income. Some, especially small and heavily indebted operations, will exit the business.
The Energy Information Administration estimates 50,000-70,000 b/d of refinery capacity will shut down each year through 2007.
"A loss of supply from these refinery closures, however, is a gain for refineries that stay open," Caviness says. The shutdowns "could have a prolonged positive effect on margins in some markets."
Total supply will suffer further from volume reductions associated with sulfur extraction and from problems of foreign supply.
Imports from Canada and Europe, where governments are imposing sulfur specifications comparable to those in the US, will remain strong. But exporters elsewhere might not upgrade facilities to meet the new US requirements.
"Overall, the stability of imports to the US market is highly uncertain," Caviness says. "Given the variety of factors influencing foreign refiners beyond meeting the US regulations, it is likely a significant portion of the current import levels will be lost."
And as the new regulations take effect, the Fitch analyst expects "a logistical dilemma on a national scale," which will further boost refining margins.
Fuel consumers won't like what this means for prices.
With the rewards of survival, therefore, comes one more catch: Consumer wrath will concentrate on a shrunken number of refiners whose only sin will have been staying in business.
(Author's e-mail: [email protected])