The downstream segment of the U.S. petroleum business is virtually certain to become more competitive because of the growing presence of national oil companies in the country's refining industry.
That's a forecast by New York investment firm Kidder Peabody.
It cites a plan by Mexico's Petroleos Mexicanos (Pemex) to form a joint venture with Shell Oil Co. covering Shell's 225,000 b/d Deer Park, Tex., refinery as the latest example of national oil companies' movement into U.S. refining (OGJ, Aug. 31, p. 28).
Earlier, Lyondell Petrochemical Co. unveiled plans to ally with units to Venezuela's Petroleos de Venezuela SA (Pdvsa) to, among other things, take over ownership of Lyondell's 265,000 b/d Houston refinery (OGJ, July 20, p. 41).
"The Deer Park and Lyondell ventures are only the latest pieces in an unfolding-yet perfectly clear-picture of an emerging industry trend," Bernard J. Picchi, Ann L. Kohler, and Jonathan R. Wolman wrote in Petroleum Equities and Prospects, Kidder Peabody's weekly comment on the industry.
"Pemex has just begun its push into U.S. refining, we believe."
BEHIND THE TREND
Picchi and his coauthors pointed out that national oil companies, which own the bulk of the world's 1 trillion bbl of proved oil reserves, have been trawling North America and Europe for downstream acquisition candidates since the mid-1980s.
National oil companies want the assured access to markets that refining assets in big oil consuming countries offer, and they seek to add value to their unprocessed crude through ownership of refining/marketing assets.
Meantime, the sky high cost of meeting requirements of the Clean Air Act amendments of 1990 has made U.S. refiners receptive to national oil companies' arguments favoring such joint ventures.
Pdvsa has been by far the most aggressive buyer of U.S. refining assets among national oil companies.
"Others are certain to follow, we believe, as the commercial imperatives that brought together Pemex and Shell, for example, are not likely to fade," Kidder Peabody's report said.
DISSECTING THE DEALS
Both sides benefit in joint ventures involving U.S. refineries, Kidder Peabody said.
For example, Shell, "which has been faulted in the past for moving too slowly to upgrade its system-wide crude oil refining capacity," will now have a partner, Pemex, who will:
- Underwrite at least one half of the expected $1 billion cost of modernizing Deer Park.
- Buy 40,000 b/d of the plant's unleaded gasoline production for clean fuel-starved Mexican citizens.
- Provide the venture with a steady supply of Mexican crude.
- Allow Shell to monetize a low return asset, freeing funds for productive uses elsewhere.
The Lyondell-Pdvsa venture was spawned for reasons similar to Shell's decision to form a joint venture with Pemex, Kidder Peabody said.
BIG PLAYER, NONPLAYERS
The report by Picchi and his coauthors said, "Nothing speaks more eloquently for a cause than a successful example, and the best example of a winning downstream venture between a national oil company and a refiner is Star Enterprise, the December 1988 Saudi Arabian-Texaco Inc. joint venture in U.S. refining.
"Before Star was formed, Texaco's downstream financial performance was unimpressive.
"But last year, the company rated first in U.S. per barrel profits among the world's six largest shareholder owned petroleum firms."
Conspicuous by their absence in U.S. refining, Kidder Peabody said, are Kuwait National Oil Co., Colombia's Empresa Colombiana de Petroleos, and Norway's Den norske stats oljelskap AS.
WHAT'S AHEAD
Kidder Peabody predicted the remaining U.S. refining capacity is likely to be triaged during the next 5 years into assets that:
- ill be sold or form joint ventures with national oil companies.
- Are capable of prospering with no shift in ownership because they enjoy special niches.
- Will close
- Will continue to operate with no change in ownership because of financially strong parents.
"Refiners in the fourth category most of the international oil companies' U.S. refineries-are likely to cause great misery to themselves and others, we think, over the next few years," Picchi and coauthors said.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
