INSIGHT: Pennsylvania refinery shutdowns rattle policymakers

16 February 2012 14:38  [Source: ICIS news]

By Joe Kamalick

WASHINGTON (ICIS)--The near-simultaneous shutdown of three major refineries in the US northeast has triggered job losses, union outrage, a capacity crisis and now a congressional hearing – but refiners say that no one should be surprised.

In actions initiated in September last year, Sunoco has shut down its 178,000 bbl/day Marcus Hook refinery and ConocoPhillips has shuttered its 185,000 bbl/day Trainer refinery, both near Philadelphia, Pennsylvania.

Sunoco’s 335,000 bbl/day Philadelphia refinery also is set to be closed, unless the company can find a buyer within a few weeks, a sale that does not appear likely.

The companies said the shutdowns were mandated by poor economics for the three facilities and ongoing operating losses.

Alarmed by these trip-hammer blows to US refining capacity and a growing chorus of pain among newly jobless workers and union leaders, the House Homeland Security Committee soon will hold a hearing on the Pennsylvania refinery shutdowns.

Congressman Patrick Meehan (Republican-Pennsylvania) this week told a press conference that the Homeland Security Subcommittee on Counterterrorism and Intelligence, which he chairs, will hold a hearing within weeks on how three refinery shutdowns in his state “could increase the risks to domestic critical infrastructure and threaten supply shortages”.

Meehan was one of six members of the Pennsylvania congressional delegation – including Senators Bob Casey (Democrat) and Patrick Toomey (Republican) – who spoke to a Capitol Hill meeting of some 400 refinery workers and union leaders.

Pennsylvania union officials and refinery workers had gathered in preparation for a sweep through the halls of Congress to lobby for some sort of federal intervention to reverse the refinery shutdowns. About 2,500 jobs have been or will be lost in the three plant closures, and officials said that overall job losses among contractors and ancillary support services may be 10 times that figure.

Meehan noted that the three Philadelphia-area refineries represent about 50% of total refining capacity in the US northeast, meaning that the high-density population and commercial region now will be increasingly vulnerable to supply disruptions and fuels price increases.

He said that closure of the three Pennsylvania refineries is part of a larger concern.

“More than 30 US refineries have closed in the last decade,” he told the union crowd.

“My hearing will help us understand the homeland security consequences of our declining domestic refining capacity, both in terms of threats to critical infrastructure and our dependence on imports from unstable parts of the world,” he said.

The refinery shutdowns, he said, posed a real threat to US economic and national security.

Meehan said he would schedule the hearing as soon as possible.

Those hearings are a good idea, said Charles Drevna, president of the American Fuel & Petrochemical Manufacturers (AFPM).

“But I hope that Congressman Meehan and others in Congress will look at the problem from a wider viewpoint,” Drevna said. 

“I hope that they take a look at what has happened with the Pennsylvania refineries and the national and state government policies that exacerbated the situation there, and what government policies are in the pipeline that could make closings happen elsewhere,” he said.

The Pennsylvania closings should have come as no surprise, Drevna added.

“I agree with the unions and the congressman that maintaining a robust, strong and economically viable domestic refining industry is vital to our national economy and national security,” he said. “The problem is when you throw ‘economic’ in there.”

He said that the Philadelphia-area refineries – which are technically locked in to increasingly expensive light sweet Brent feedstock – have been caught in “an economic and regulatory vice that dictated the [shutdown] actions taken”, which, he said, “were absolutely economically justified”.

“There’s no question that the high price of light sweet crude, the highest prices of all, played a role,” Drevna said, but continuing reduced demand, renewables blending, low-sulphur fuels requirements and other existing and pending regulatory burdens also contributed to the Pennsylvania shutdowns.

Drevna charged that: “Some in Congress and others who are now waking up to the fact that our refineries are a vital national asset, many of them have constantly voted for legislation that would accelerate the demise of refining and, if unchecked, will accelerate closings for other refineries that are now facing the same sort of circumstances.”

He agreed with warnings voiced by union officials at the Capitol Hill meeting that refineries in California soon may face the sort of end-game economic realities that brought down the Philadelphia facilities.

“Some of the same people who are now worried about refining capacity are the same ones who voted against legislation that would have stopped EPA from proceeding to regulate refining and fuels under the Clean Air Act,” he said, referring to the Environmental Protection Agency (EPA).

“They’re the same people, some of them, who support President Obama when he says that 'unwarranted subsidies’ for energy companies should be ended and who supported his decision to cancel the Keystone pipeline.”

Drevna also noted that many lawmakers support Energy Secretary Steven Chu’s oft-cited policy declaration that “Somehow we have to find a way to boost the price of gasoline to the levels in Europe”, or about $7/gal, in order to force US consumers to abandon gas-guzzler cars in favour of alternative fuels and electric vehicles.

Former Congressman John Peterson, who represented Pennsylvania in the House, argues that “the compounded burden of federal regulations was a significant factor in the closure of 66 petroleum refineries in the US over the past 20 years”.

Peterson, now on the board of the American Energy Alliance, for years championed the effort in Congress to end, briefly, the decades-long moratorium that barred drilling in more than 85% of the US outer continental shelf (OCS) areas.

“If union members and some liberal Democrats are as concerned about energy supplies as their recent statements indicate, why did they support all-cost, no-benefit EPA regulations that have contributed to the closures in the first place”? Peterson asked.

John Felmy, chief economist at the American Petroleum Institute (API), agreed that the high cost of Brent crude and other light-sweet oil imports were a major factor in the demise of the Philadelphia refineries, but he too pointed his finger at regulations.

“The other factor is the heavy regulatory environment, all the fuel changes that are required of refiners, such as low-sulphur gasolines, ultra low-sulphur diesel, low-sulphur off-road fuels for locomotives, marine engines, the list goes on,” he said.

Felmy said that the US refining industry spent $20bn (€15.2bn) to implement low-sulphur mandates and will have to spend more to meet pending EPA requirements for still lower sulphur content in fuels.

“All of those costs add to the poor economics of refining,” he said, noting that “refiners nationwide lost money in November and December, and the industry lost money in the fourth quarter as a whole – and the prospect is even worse in the near future.”

He noted that in addition to federal regulatory mandates, state governments also are imposing an increasing burden of rulemaking. He cited New York state’s ruling of last year requiring refiners to produce ultra low-sulphur home heating oil, a mandate that other northeast states are considering.

“There’s no question but that all these additional regulations impose costs, and they’re imposed with little thought of their impact,” he said.

“We’ve been saying this for a long time, and we’ve been ignored,” Felmy said, “and now those chickens have come home to roost.”

 ($1 = €0.76)

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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