Refining economics have been quite gloomy this year, and the outlook is not particularly good.
Refiners are shutting in capacity in order to shore up margins in light of dismal demand for transportation fuels and heating oil. As KBC Market Services noted in a recent Weekly Oil Comment, some of the refinery closures will be permanent, while others are open to offers from anybody who might be willing to buy the refineries.
The analysts explain that Europe's largest independent refiner Petroplus operated at only 61% of capacity during this year's third quarter. The company's Teesside refinery in the UK has been closed for most of 2009, and probably will be converted into a storage facility. The fate of Royal Dutch Shell PLC's Stanlow refinery could be the same, and Total SA's Dunkirk refinery in France is shut down. Others in Europe are operating at reduced capacity.
In the US, Sunoco Inc. shut down its refinery in Eagle Point, NJ, and sold its Tulsa refinery. Valero Energy Corp. announced that it intends to permanently shut down its 210,000-b/d Delaware City, Del., refinery, citing financial losses caused by very poor economic conditions, significant capital spending requirements, and high operating costs.
In its November Oil Market Report, the International Energy Agency looked at changes taking place in refining markets that might make for improved economics in the future.
IEA said although the outlook for refineries is bleak, particularly in the countries of the Organization for Economic Cooperation and Development, some necessary changes appear to be taking place. These changes could signal the end of the worst for refiners as they adapt to current conditions.
IEA noted that refinery profitability is typically tied to upgrading margins more so than to hydroskimming margins, which historically have averaged below zero. But the recent removal of large volumes of heavy sour crude from the world oil market has crushed the light-sweet/heavy-sour spreads, thereby reducing upgrading margins.
At the bottom of the last refining profitability cycle in 2002, refineries shut in crude units and simply fed their vacuum towers with residue in order to supply the products market and lose as little money as possible. IEA cited recent OECD country data suggesting that today's markets have not allowed for this opportunity, such that the two potential sources of refining profits over the past 20 years have been temporarily removed.
Recent changes
Looking at utilization of upgrading units at US refineries, IEA found that in recent months, catalytic cracking unit throughputs moved above their 2008 levels.
"Given their bias towards gasoline production, this perhaps points to the reemergence of gasoline as the binding constraint on US refining activity. While encouraging, the continued weak premium for high quality gasoline components, such as alkylate, and strong gasoline imports, continue to limit gasoline's ability to restore refinery margins," IEA said.
In contrast, weak hydrocracking throughputs—and IEA adds, more importantly, weak coking unit throughputs—demonstrate a response to weak distillate markets and the narrowing of heavy sour crude discounts. This suggests that refiners are adapting to current market circumstances.
There have also been big changes in global crude flows that have impacted refiners. US imports of crude from Saudi Arabia have dropped to about 700,000 b/d from about 1.5 million b/d, while imports of crude from Mexico fell to about 1 million b/d in August from a 5-year average of 1.6 million b/d.
Imports from Canada have increased, and refiners have had to adapt to new crudes that have offset some of the large declines in imports from Saudi Arabia and Mexico.
In addition, there have been changes in fuel oil markets resulting from narrower fuel oil cracks. IEA noted three important changes. First, fuel oil yields in the OECD have climbed, suggesting that refineries are responding to shifting product cracks. Second, above-average fuel oil exports from the former Soviet Union and Saudi Arabia may help restore typical fuel oil discounts, although this may be hampered by the rise in the volume of condensate produced.
The third change in the fuel oil market IEA cites is the start of long-term or permanent refinery closures, which will ring in a new normal state for the refining industry.
IEA said capacity rationalization will accelerate as uncompetitive capacity is marginalized and shut down. The industry is struggling with persistently weak profits, and while the initial changes are encouraging, more must be done.
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