US refiners need strong exports to help overcapacity woes - Sunoco

18 November 2010 21:57  [Source: ICIS news]

HOUSTON (ICIS)--US refiners must take advantage of niche marketing and export opportunities to the developing world in order to survive growing problems with domestic overcapacity, the chief executive of Sunoco said on Thursday.

About 2.4m bbl/day of excess refining capacity exists globally, with much of it in the US, said Lynn Elsenhans, CEO of Sunoco.

As such, US refiners could be faced with substantial issues of overcapacity if they are unable to export or find niche marketing, such as using facilities for terminals and focusing on certain US markets.

“In 2009, estimates [were] that 30% of US refiners were operating at a negative capital,” Elsenhans said. "We’re seeing a big shift in the refining sector from the US [as] the major refining sector of the world to China and the Middle East.”

Elsenhans spoke on Thursday at the Deloitte Oil and Gas Conference

Elsenhans noted that major capacity additions were being made in the developing markets of Latin America, the Middle East and Asia.

“World energy demand is growing, and growing fast,” said Lynn Elsenhans, CEO of Sunoco. “That’s going to put pressure on all of us."

To that end, some refiners have been looking to acquire capacity outside of the US. For example, Valero recently said in its third-quarter conference call that it was looking at acquisitions in Europe, where about 15 refineries are for sale.

“That’s creating a difficult road to hold,” Elsenhans said. “There might be a lot of opportunities to enter the European markets, but that’s not where the growth in demand is going to be.”

In the short-term, Elsenhans said the US industry needs to take advantage of oil production growth and strong demand for diesel outside of the US. Closing a refinery is very difficult, even in the US, Elsenhans explained.

“The third quarter of 2008 was the most profitable Sunoco had seen since the beginning of the company, and because of Hurricane Ike, I could see that as the best quarter for many, many refiners," Elsenhans said. “I came in and said that refining margins are going to collapse, and to survive, we need to stay cash positive – and people thought I was insane.”

As a result, Sunoco turned its focus to lowering costs and optimising production, she said.

With the fall of Lehman Brothers and the following financial crisis, liquidity became a concern for Sunoco and most US refiners. Elsenhans helped set a more competitive cost structure to reduce annual expenditures by $30m (€22m).

The company also shut its Eagle Point refinery in New Jersey in an effort to boost operating rates at its Toledo, Ohio, and Philadelphia, Pennsylvania, refineries to 90-95%.

This allowed Sunoco to reduce operating costs by one-third, she said.

In addition, Sunoco cashed more checks to get through the volatility of the recession and provide a way for the company to grow, Elsenhans said.

"We boxed up liabilities. [We] tried to deal in cash returns and get the costs of a barrel down," she said.

In its recent third quarter, Sunoco swung to a net income of $65m as sales increased 12%.

($1 = €0.74)

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By: Sheena Martin
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