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

Economic growth, Oil markets

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.

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