Margins for U.S. high conversion refiners through 2001 will be large enough to justify spending on modernization programs, Pace Consultants Inc., Houston, predicts.
However, average conversion refiners--those with no residuum destruction capability--could find it hard to generate enough capital to meet U.S. pollution control requirements.
Low conversion refiners will be hard pressed to stay in business.
Pace reaches those conclusions in a long term crude oil and refined products forecast. The yearly study includes Pace's outlook for refining margins, implications for each refined product, and fundamental factors expected to shape U.S. refiners' strategic and operating decisions.
Pace looks for oil prices to remain relatively soft through 2001, as supply outpaces demand. The forecast, a supplement to Pace's monthly refining outlook, includes price outlooks for oxygenated and reformulated gasolines, methyl tertiary butyl ether (MTBE), and low sulfur diesel fuel.
Pace expects U.S. energy consumption to grow at a rate well below the rise in gross domestic product (GDP). Despite slow growth in energy demand, Pace expects oil imports to exceed U.S. production by 1995.
Based on the premise that Congress will not allow exploration on any part of the Arctic National Wildlife Refuge, the Pace study predicts U.S. oil production will decline about 2%/year through 2001.
FORECAST FUNDAMENTALS
In preparing the forecast, Pace calculated oil rices from monthly average spot assessments, plus a freight element to refining centers. Products prices are based on waterborne average spot assessments, with Los Angeles prices set according to average pipeline assessments.
The supply-demand forecast is based on GDP growth rates of 1.6% in 1992, 3% in 1993, 2.9% in 1994, and 2.6%/year after that.
To encompass the range of oil prices possible through 2001, Pace developed high case, low case, and most likely case scenarios:
- The high case assumes a continued decline in Russian oil production, a controlled embargo on Iraqi oil exports, and higher than expected world demand for petroleum products. This scenario results in crude oil prices increasing in 2001 to $32.90/bbl from $26/bbl in 1993.
- The low case assumes prompt lifting of sanctions against Iraq, ineffective restraint of production by members of the Organization of Petroleum Exporting Countries, and turnaround of Russian oil production. This results in a crude oil price in 2001 of $19.20/bbl, up from $16.80/bbl in 1993.
- The most likely case delineates Pace's view of oil prices for the coming decade. In this case, Pace predicts the price of West Texas intermediate will rise to $25/bbl in 2001 from $20.60/bbl in 1993.
REFINING MARGINS
Pace's data show U.S. Gulf Coast refining margins increased steadily through 1991 from depressed levels in 1987.
Gross margins for a high conversion refiner with catalytic cracking, reforming, and delayed coking capabilities will be $5-6/bbl through 2001 in Pace's most likely scenario.
At the opposite end of the conversion spectrum, low conversion refiners with atmospheric distillation, catalytic reforming, and necessary hydrotreating units will continue to post negative margins.
Average conversion refiners with no residual fuel destruction capability could find it hard to generate capital required to meet U.S. pollution control requirements.
Pace expects U.S. gasoline demand to grow about 1%/year, increasing to 7.6 million b/d in 1996 from 7.3 million b/d in 1992. Growth of U.S. gasoline demand after 1996 will slow to about 0.7%/year, reaching 7.8 million b/d in 2001.
The spread between the prices of WTI and unleaded regular gasoline by 1996 will increase to about 12.5 cents/gal from 10.5 cents/gal in 1993, then slip to 11.5 cents/gal by 2001. Higher prices for reformulated and oxygenated gasolines are expected to support stronger spreads through 1996.
Pace says new gasoline reformulation rules after 1996 will cause pump prices to increase and slow the growth of gasoline demand. Adding oxygenates to the gasoline pool will tend to stretch supplies, but required reductions of gasoline Reid vapor pressure and aromatics content will cause marginal refineries to shut down, effectively reducing supplies.
DISTILLATES FORECAST
Pace predicts U.S. demand for kerosine jet fuel will grow at a rate of 4%/year to 1.6 million b/d in 1996 and 1.9 million b/d in 2001.
The price spread between low sulfur jet kerosine and No. 2 distillate will increase to 4.5 cents/gal in 1993 from the current 2.5 cents/gal. That's because the introduction next year of low sulfur diesel fuel is likely to divert some low sulfur kerosine normally used to produce jet fuel.
The jet kerosine-No. 2 distillate price spread will decline to 4 cents/gal in 1996 and to 3.5 cents/gal in 1997 and through the end of the forecast period.
Total distillate demand will grow 2.3%/year to 3.4 million b/d by 1996 from 3 million b/d in 1992. Then the growth rate through 2001 will slip to 1.8%/year, with demand reaching 3.7 million b/d.
About 42% of U.S. distillate production is consumed as highway diesel. That is the only category of distillate fuels subject to the Clean Air Act's 0.05 wt % sulfur limitation. For the study, Pace assumes all other distillate consumers will continue burning 0.2 wt % sulfur distillate.
Pace figures the price of distillate fuel based on a spread between unleaded regular gasoline and No. 2 heating oil. That spread will average 4 cents/gal in 1993-94 and 3.5 cents/gal thereafter.
At the same time, low sulfur diesel fuel through 1995 is expected to garner a 5 cents/gal premium over No. 2 oil. The cost of severe desulfurization should cause the premium to decline after 1995 to 3.5 cents/gal.
An increasing supply of gas for residual fuel users through 1996 is expected to stifle demand for resid. If gas remains competitive, Pace said, demand for residual fuel will slide 1.6%/year through 1996, when U.S. demand will average 1 million b/d. Residual fuel demand after 1996 through the end of the century will decline 1%/year to 970,000 b/d.
Pace expects the price of 3% sulfur residual fuel oil to erode gradually through 2001 relative to the price of WTI, encouraging construction and expansion of cokers and residual hydroprocessing units. However, Pace does not foresee overbuilding of capacity before the end of the century because of limited investment capital and difficulties in to obtaining building permits.
Pace is a subsidiary of Jacobs Engineering Group Inc., Pasadena, Calif.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
