By OGJ editors
HOUSTON, July 26 -- US oil refiners have enjoyed sustained favorable margins since early 2003 that could extend into 2005, but product demand and stringent environmental regulations have pressured capacity to keep pace, said a report by Standard & Poor's Ratings Services.
The report is entitled "Oil Refiners Pressured to Keep Pace With Demand Growth, Clean Fuels."
"Since the early 1990s, industry consolidation has created a handful of very large, well-capitalized players that dwarf the remaining independents," said S&P credit analyst John Thieroff.
"Continued consolidation is possible, albeit at a more gradual pace than over the past decade, as smaller independent refiners attempt to gain scale to compete with larger independents and integrated oil companies," he said.
In addition, environmental regulations since the 1970s has rendered many smaller refineries economically marginal or, in many cases, uneconomical, Thieroff said. Since the 1980s, the number of US operating oil refineries has shrunk to 150 from more than 300.
Strong demand growth since the 1990s has pressured refining capacity to keep pace, he said.
Capacity creep
Capacity growth has been slight in recent years, expanding 0.7% annually during 1999-2003, primarily through capacity creep. Most recent downstream investment has been to help meet clean-fuels requirements that are being phased in during 2004-10.
Ongoing efforts to meet low-sulfur gasoline and low-sulfur diesel regulations will drive most of the sector's capital spending into 2006, Thieroff said.
Refinery closures
Small independent companies having limited access to capital might consider plant closures, he said.
"The likelihood of additional refinery closures grows as compliance deadlines draw near. If the capacity lost to shutdowns exceeds expected capacity creep, an already tight market could face considerable strain, particularly during periods of high seasonal demand. Any unexpected refinery or refined product outages will likely cause considerable margin spikes in the near term�," he said.
Old Greenwich, Conn.-based Premcor Inc. closed its 70,000 b/d Hartford, Ill., refinery 2 years ago due to the lack of an economically viable solution to reconfigure the plant in order to meet federally mandated environmental standards (OGJ Online, Sept. 24, 2002).
Shell Oil Products US plans to close its 70,000 b/d Bakersfield, Calif., refinery in October "could further hinder supply in that state and help drive already high margins to new plateaus once the facility closes," he said. The US Federal Trade Commission is investigating that planned closing (OGJ Online, July 8, 2004).
