Northeast supply stress

April 16, 2012
Logistical constraints threaten to aggravate new oil supply stress possible this summer in a part of the US not known for learned patience where fuel prices are concerned.

Logistical constraints threaten to aggravate new oil supply stress possible this summer in a part of the US not known for learned patience where fuel prices are concerned. For the oil industry, the timing is unfortunate.

The problem area is the Northeast, where refinery closures have trimmed locally available product supply and another closure is possible. Now questions have arisen about the ability to move replacement supply in sufficient amounts into the stricken region from elsewhere in the US.

The US Energy Information Administration is following developments. In February it warned of trouble if Sunoco closes its 335,000-b/d refinery in Philadelphia. The company is exiting the refining business and wants to sell the Philadelphia facility, its last. If unsuccessful by July, it will quit running crude.

Market adapting

For now, EIA said, the Northeast market is adapting smoothly to the closures of two Pennsylvania refineries last year. In September ConocoPhillips idled its 185,000-b/d facility at Trainer. Sunoco followed in December by closing its 178,000-b/d refinery in Marcus Hook. Another jolt came in January, when Hovensa announced the closure of its 350,000-b/d refinery in the Virgin Islands, which shipped product to the US East Coast.

Before the closures, Northeast refineries had supplied 40% of the gasoline, 60% of the ultralow-sulfur diesel (ULSD), and 45% of the heating oil used in the region. The rest of the supply came from imports and the Gulf Coast. If Sunoco shutters the Philadelphia refinery, EIA said, the Northeast might need an incremental 240,000 b/d of gasoline and 180,000 b/d of ULSD from nonlocal sources. And the requirement comes as New York state implements a requirement that the sulfur content of heating oil match that of ULSD. The effect, EIA said, will be to raise New York's ULSD use by an average of 20%/year, with the effect concentrated in winter.

Of the two major products, ULSD will be the tougher supply problem. Gasoline is more readily available for import, although refinery closures in Europe and by Hovensa have tightened Atlantic Basin supply. Most of the replacement ULSD supply will have to come from the Gulf Coast. The required movement raises logistical questions that, with suppliers waiting to see what Sunoco does, lack answers.

After extra amounts pipelines might carry and imports, about 100,000 b/d of the replacement ULSD will have to move by water, EIA reckons. But the supply of tankers and barges able to move between US ports is limited by the Jones Act, which requires that intracoastal shipping be conducted by US-flag vessels built in the US, owned and crewed by US citizens. In an update this month, EIA estimates the US has fewer than 40 tankers and perhaps 270 barges meeting these requirements. The American Maritime Partnership, a trade group, has told US officials the industry can meet the shipping needs.

But there will be cost. EIA estimates shipping costs between the Gulf Coast and Philadelphia at 7¢/gal for a round trip by large tankers to 15¢/gal for barges. To the extent foreign ULSD is available, the transport component of imports might be lower than barge costs. EIA says tanker movement of product from Europe to New York Harbor has been 5-9¢/gal during the past year.

Cost and uncertainty

"The largest costs," EIA says, "would likely be incurred during the initial transition period following a shutdown of the Sunoco Philadelphia refinery as the market resolves initial supply dislocations." The shipping industry is flexible over time—but less so in the short term. "It remains unclear exactly how and at what cost the Northeast would be supplied and what, if any, additional costs might be incurred outside the Northeast" from shipping diversions, EIA says.

This uncertainty arises in an election year, with the price of vehicle fuel already a political issue. New costs, absent a crude-price slump, will raise fuel prices. If they materialize, the industry should be ready to tell Northeasterners why.

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