Shell, Saudi Aramco to build new $7bn US refinery

Shell and Saudi Aramco have now confirmed plans to spend $7bn to build what they term ‘the first new refinery in the U.S. in more than 30 years’. They will achieve this by adding 325,000 barrels per day (b/d) to their existing Port Arthur, Texas, facility, taking total capacity to 600,000 b/d. It is scheduled to come on stream in 2010.

Refining capacity has been tight in the US for many years, due to historically low refining profitability and environmental difficulties in siting new refineries. Both these factors have changed over the past couple of years. Post Hurricane Katrina, refining profitability has been very strong, whilst President Bush recently even offered to allocate military land to help overcome environmental issues.

When completed, the Port Arthur refinery complex will be the largest in the US, ahead of Exxon Mobil’s 562,000 b/d at Baytown, Texas. It will be able to process ‘heavy crudes’, for which refining capacity is currently short around the world, and will supply Shell’s 7700 gasoline outlets in the Eastern and Southern USA.

There are two elements of this announcement that are of particular interest to the petchem industry. The first is the degree of cost escalation now taking place in major construction projects. In April 2006, Shell estimated that the expansion cost would be around $3bn. But this has now more than doubled over the past 18 months. One assumes also that Bechtel/Jacobs will be taking much less of the risk of cost over-runs as well.

The project also confirms gasoline’s increasing importance within the major oil companies. And with new gasoline-focused refineries being planned all round the world, there is a clear danger of naphtha production becoming a ‘poor relation’. This could keep petchem feedstock prices relatively high, even after gasoline margins return to more normal levels.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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