INSIGHT: Pressure mounts for US refinery closures

21 January 2010 17:14  [Source: ICIS news]

By Stephen Burns

Bleak outlook for US refiningHOUSTON (ICIS news)--Americans' love affair with cars is legendary. So in a country with 246m vehicles for its 209m licensed drivers, how could making and selling gasoline not be profitable?

That's the question that oil company shareholders and some nervous employees will be asking in the next few weeks as the firms report fourth-quarter results that are certain to paint a bleak outlook for the refining business in the US.

The picture could be so dark, in fact, that some financial reports may even be accompanied by announcements of refinery closures.

That would sound alarm bells for chemical producers, many of which rely on feedstocks from adjoining refineries.

The situation is a stunning turnaround from just a couple of years ago when the corporate and political focus was on how to enable US refiners to expand capacity or even building greenfield assets - something that not had happened since 1976.

Refiners are even still feeling the political heat from their salad days in 2007, as evidenced by the recently revived proposal to force them to disclose their turnaround plans months in advance.

Economic recession has obviously not helped business conditions, but the US refining industry's underlying problems are structural, not cyclical.

First and foremost, there is too much capacity compared with a demand pool that is going to grow slowly at best for the next few years before going into a longer-term decline.

Analysts see three factors behind the downtrend in demand that will become evident from around 2014 on.

First, demand destruction will occur due to relatively high prices, reflecting expectations that crude oil values will stay high in the long term. US motorists do enjoy by far the cheapest gasoline in the industrialised world at around $2.50/gal (€0.46/litre) but they consume far more than counterparts elsewhere.

The Earth Policy Institute, a Washington-based environmental think-tank, published research this month that shows the US fleet declined by 4m vehicles in 2009, as 14m were scrapped and only 10m new automobiles were sold.

That was the first decline since World War II, and the downward trend could continue through 2020, according to the research.

The second factor is that government regulations requiring greater fuel efficiency in vehicles will also shrink the natural level of consumption. Notably, the virtual collapse of the US automobile industry in 2009 has given the government a bigger stick to wield as it seeks to meet environmental and energy security goals by weaning the country off its preference for large vehicles and big engines.

The third factor is the entrenched place that ethanol has grabbed in the US fuel system in the last decade. As with the fuel efficiency trend, government mandates have played a major role in giving ethanol a bigger slice of the pie.

According to the most recent data available from the Renewable Fuels Association (RFA), US ethanol demand reached 767,000 bbl/day in October 2009.

That represents 8.5% of the 8.978m bbl/day of finished gasoline demand seen in the same month, as reported by the Energy Information Administration (EIA).

As the overall demand for gasoline declines in years to come, ethanol's relative share of the shrinking pool is bound to grow. Taking the US farm sector's substantial political clout into account, it is hard to see ethanol losing any share going forward.

US refiners so far have mainly addressed the issue of over-capacity by reducing operating rates.

Capacity utilisation briefly dipped below 80% in November, according to four-week averages reported by the EIA; apart from hurricane-related slowdowns in 2005 and 2008, that was the lowest operating level since the recession in 1991-1992.

In contrast, operating rates reached highs in the 90%-plus range in 2006 and 2007, and just below 90% in 2008.

But reduced rates are ultimately a delaying action rather than a solution. Some refineries will simply have to be taken out of the game.

Stephen Jones, a consultant with Purvin & Gertz in Houston, said that US refineries will account for part of the 2.4m bbl/day of global refining capacity that needs to be shut down to bring balance to supply and demand.

The shutdowns to come would be on top of the 1.4m bbl/day of worldwide capacity that has already been mothballed since the sharp downturn in commodity markets in the fourth quarter of 2008, Jones said.

The crush on margins "has been an amazing rug-pull from under the feet of the refiners", said Jones.

This year has already seen Shell's decision to convert its 130,000 bbl/day Montreal refinery in Canada into a fuel terminal, after the company was unable to find a buyer for the asset. It had been on the block since July 2009.

In the US, decisions on which refineries might be closed will not necessarily reflect overall industry economics, Jones noted.

A particular plant may not be the smallest or least efficient in the US, but may be the least valuable in its owner's portfolio, he said.

With analysts seeing future shutdowns as a foregone conclusion, US chemical producers will be watching the looming corporate results season closely to see which of their neighbours might be heading for mothballs.

($1 = €0.71)

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By: Stephen Burns
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