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FT REPORT – ENERGY IN THE AMERICAS: Hurricanes prompt action to refine strategies

By Sheila McNulty in Houston, Financial Times
Published: May 08, 2007

When hurricanes Katrina and Rita cut through the Gulf of Mexico in 2005, they left a string of damaged oil and gas assets in their wake. Among the hardest hit were the refineries that are based along the Gulf to process oil brought in from the ocean, writes Sheila McNulty.

The US was forced to step up imports of refined products from abroad to make up the shortfall until the refineries were repaired.

“What the hurricanes did was sharpen the focus of the world on how short refining capacity is in the world,” says Bruce Smith, chief executive of Tesoro, a US independent.

The US refining industry exemplifies the problem. In the 1980s, the country had more than 300 refineries, Mr Smith says, and now it has just 144, forcing it to import about 12 per cent of its petrol (gasoline) supply. “Capacity has declined around the world.”

Nobody wants a refinery in their backyard, making it difficult for companies to build, and obtain permits to run, new facilities. Besides, refining has traditionally been a low return business relative to the capital needed to run it. “Slowly and surely new regulations and increased competition have driven marginal refineries out of business,” Mr Smith says.

Yet, since the shortage in refined capacity was brought home by the hurricanes of 2005, oil majors have put forward plans that would add substantial capacity to existing refineries.

Shell is considering doubling the size of its Motiva Port Arthur refinery to make it the largest refinery in the US. “We hope to take a final investment decision on it later this year,” says David Sexton, vice president of Shell Oil Products for the US.

Others have already moved forward, yet they are competing for skilled labour with those still doing repairs from the hurricanes, and this has pushed up the cost of projects.

Parrish Potts, who leads Accenture’s hydrocarbon supply chain practice in north America, says: “The coastline is still devastated. There is a lot of labour – construction and engineering labour – going into that. Yet all the competition wants to build capacity.”

The resulting inflation in labour and capital costs has led some to roll back plans. In August Tesoro cancelled investment plans at a refinery in Washington state after the projected cost rose from $250m to $500m.”The economics just did not justify continuing with the project,” says Mr Smith.

Nonetheless, he believes with strong demand there are still a number of good years to come for refiners.

Wood Mackenzie, the energy consultancy, says, however, that the turning point will come within the next few years, when the US deficit in petrol will peak and start declining. It might well catch some refinery owners, rushing to expand capacity, off guard.

“North American refiners need to spend more time looking at global developments,” says Mike Wilcox, Wood Mackenzie’s head of global downstream oil. He expects the current surplus in petrol in Europe to continue to grow, even as the deficit in the US peaks and falls.

Mr Wilcox expects 1.6m barrels per day in crude capacity to come on stream in north America by 2020 – even as demand for refined product declines with private vehicle ownership reaching a peak, cars becoming more efficient and biofuels being used increasingly as an alternative.

 

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