After reading the article "Reduction in fuel use puts refiners in bind" referencing a study by Roger Ihne, Deloitte LLP, "A Tsunami of Change Bearing Down on the Refining Industry," one might think that investing in the future of US refining would not be advisable (OGJ Online, July 10, 2009). On the other hand, without investment in US refining now, the possibility of achieving any level of independence from importing foreign oil and finished products is unfeasible. Because the study by Deloitte does not comprehend important global factors affecting the US refining industry, some of its conclusions could be misleading.
We heard much about "stricter fuel economy standards" and more efficient combustion engines in the 1970s and 1980s. Today we have larger family vehicles, the "two SUV's in every driveway" syndrome, cool Hummers, and finally major automobile manufacturers in bankruptcy; so much for "efficiency" reducing gasoline demand. As for federal "mandates for blending ethanol and other biofuels," the sooner we realize that unsubsidized production of these "fuels" is neither efficient nor economical, the sooner we will focus on the critical issue of making every barrel of oil more productive in its yield of transportation fuels.
The US already imports gasoline—a lot of gasoline. To project a reduction in gasoline demand in the US over the next 15-20 years based on assumptions of government-defined stricter fuel economy standards and mandates for the use of ethanol and biofuels lacks global perspective. It should be more evident today than ever before that the economies of the world are deeply intertwined. We must plan for the future not only based on our nation's needs but on those of other economies. If refining capacity is shut down and not replaced by more efficient, complex refineries capable of processing heavy crude oil, tar sands, and oil shale, the global shortage of refined petroleum products, especially transportation fuels, will cause a tsunami of its own.
Today, over 75% of the world's proven recoverable oil reserves are owned by members of OPEC. The vast majority of this oil supply resides in the Middle East. These sources of liquid hydrocarbon are being depleted at astonishing rates.
The next great source of oil is actually in the Western Hemisphere. A recent USGS report estimates that there is 1.085 trillion bbl of recoverable heavy and natural bitumen oil in known basins around the world. According to the same USGS report, over 75% (831.9 billion bbl) of this next generation oil supply is contained in basins of North and South America. This geographic shift in the location of future feedstock is another reason to increase refining capacity in the US.
The importance of reducing greenhouse gas emissions from all sources cannot be overlooked. Routine refinery maintenance and periodic upgrades in both capacity and complexity must include capture and sequestering of harmful emissions. This type of investment is not new to the refining industry and affects both the large, Gulf Coast refiners and smaller boutique operations around the US. Most refiners would agree that process efficiency and a sharp eye on operating costs are more important when trying to maintain or increase margins.
The "golden age" of the modern, highly efficient refinery is just dawning and is an essential part of the recovery from the current global recession. Flexibility and the ability to quickly respond to change are the trademarks of the entire oil and gas industry from the start of wildcat exploration through the marketing and sale of petroleum products. Refinery utilization has been affected more by the increase of heavier, high sulfur crude oils entering refineries than any economic cycle. Since the "oil boom" of the late 1970s through the "bust" and collapse of the industry in the mid-1980s, the oil industry has learned many lessons. The reduction in the number of refineries from 319 in 1980 to 149 in 2000 did not reduce the total refining capacity of the US. Refineries simply became larger. According to a US Energy Information Administration (EIA) report, although the number of refineries in the US dropped from 283 in 1982 to 159 in 2002, the throughput capacity remained over 17 million b/d. In fact, the average refinery capacity increased by over 41,000 b/d.
In a recent Medium-Term Oil Market report by the International Energy Agency (IEA), world oil demand is projected to reach 89 million b/d by 2014. Today, total worldwide refinery capacity is less than 85 million b/d. Clearly, in order to process the additional 4 million b/d of crude oil production, more refining capacity must be added, and because the type of crude oil is shifting from light sweet to heavy sour, refineries will be redesigned and upgraded to process more difficult feedstock. It should also be noted that in 2005, the IEA projected world oil demand to exceed 96 million b/d by 2014—more than 10 million b/d above current global production levels. Whatever the number, crude oil consumption will increase, and so too must refining capacity in order to convert black gold into usable consumer products.
Richard D. Chimblo
Chief executive officer
EOR Energy Resources Inc.
Houston
