Houston Chronicle: Refiners hit brakes on growth

EXTRACT: Motiva, a joint venture between Shell Oil and Saudi Aramco, plans to make a final investment decision this year on a project that will double the size of its 285,000-barrel-a-day refinery in Port Arthur.

THE ARTICLE

As project cost soar, companies are rethinking their plans to add capacity

By BRETT CLANTON
Copyright 2007 Houston Chronicle
June 22, 2007, 1:11AM

Recently, Placid Refining Co. was ready to launch a major expansion of its oil refinery in Port Allen, La., when it received some unwelcome news.

In the year since it hatched the idea and ran the numbers, the cost of the project jumped by nearly 50 percent, said Gary Fuller, vice president and general manager at Placid.

The swift hike in costs meant the project was no longer affordable and had to be shelved. Though he remains optimistic it will happen, Fuller said the expansion has not been rescheduled.

Gasoline refiners big and small said they have delayed or canceled expansions amid a huge spike in costs of materials and labor, and an uncertain future demand for gasoline.

In recent weeks, that uncertainty has grown as lawmakers in Washington consider higher vehicle fuel economy standards and mandates to boost ethanol production — measures that could curb gasoline usage in coming years.

Pushing old refineries

The delayed building projects could affect American drivers. Fewer expansions mean the country’s aging refineries will continue running full tilt, and relief from high gas prices could be put off longer.

On Thursday, the national average price of regular unleaded was nearly $3 per gallon, up from $2.85 per gallon a year ago, according to AAA.

But if gasoline refiners continue seeing strong profits, as they have in recent years, some expansion projects could be put back on the table, the refiners said.

“Right now, the margins are really, really good,” said Bill Day, spokesman for San Antonio-based Valero Energy Corp., the nation’s largest refiner. “That gives us incentive to move ahead.”

Scaling back

As recently as May, the American Petroleum Institute said refiners planned to boost the nation’s refining capacity almost 11 percent through expansion projects representing 1.6 million barrels a day. Now, the trade group says only about 1 million barrels a day in projects will go forward.

Because not all refiners make plans public, it is difficult to get a precise list of all the projects that have been delayed or scrapped. But a few large projects have attracted notice.

This spring, Valero postponed a 22,000-barrel-a-day expansion of its refinery in Texas City. ConocoPhillips has delayed expansions at facilities in Sweeny and in Alliance, La. And last fall, San Antonio’s Tesoro Corp. canceled a 25,000-barrel-per-day expansion at its Anacortes, Wash., plant.

A year’s big difference

Sharp cost increases are partly to blame for the pullback, said John Felmy, chief economist for the petroleum institute. A year ago, the cost of expanding a refinery was about $10,000 per daily barrel of capacity added. But a boom in expansion projects has driven up both the price of steel and the rates construction firms charge to install new equipment. “Now, it seems to be closer to the $20,000-per-barrel range,” he said.

Those numbers have been unsettling to some refiners.

“We’re still committed to going forward,” said Kevin Brown, executive vice president of operations at Sinclair Oil Corp. “We just don’t know how far.”

The privately held firm Salt Lake City firm, which is about to complete a 13,000-barrel-a-day expansion of its Sinclair, Wyo., plant, is in “the early planning stages” of an add-on at another facility, he said.

The ethanol worry

Aside from cost increases, refiners worry that President Bush’s plan to cut gasoline usage 20 percent by 2017 — mostly by blending more ethanol into gasoline — and to boost vehicle fuel economy 30 percent by 2025, will sap the incentive to invest in expansions.

“We’re getting kind of a mixed message,” said Day, the Valero spokesman. At the same time lawmakers are urging the industry to expand refineries to help lower fuel prices, they are pushing measures that could weaken demand for gasoline, he said.

Some lawmakers and consumer groups have suggested that refiners are using that argument as an excuse to keep U.S. refineries running at their peak and profits high.

The nation’s 150 oil refineries have been operating at an average of 92 percent of capacity since the 1990s, compared with an average of 78 percent in the 1980s when there were more refineries, according to a May report by the Government Accountability Office.

The lack of spare refining capacity contributes to higher profit margins but also means the nation’s fuel-making infrastructure is vulnerable to short-term supply disruptions that can produce price spikes at the pump, the agency said.

A new refinery has not been built since 1976. Instead, the industry has increased capacity at existing refineries, where permitting is easier to obtain and costs are less onerous. Yet the additions have not kept up with rising gasoline demand.

In 2006, the U.S. consumed an average of 387 million gallons of gasoline per day, 60 percent more than the daily usage in 1970, the GAO said. The nation’s gasoline habit has increased 1.6 percent per year for the last 36 years, the agency said.

Marathon undeterred

That’s why some refiners are confident that expansion projects are worth the risk.

Marathon Oil Corp. of Houston recently approved a $3.2 billion expansion of its Garyville, La., refinery, even after the bill came in $1 billion more than the original estimate. The project will increase the facility’s capacity by 180,000 barrels a day to 425,000 barrels a day.

“We believe the fuel produced at Garyville will be needed,” Marathon spokeswoman Chris Fox said.

Valero is mulling a 130,000-barrel-a-day expansion at its St. Charles, La., refinery that would bring capacity to 380,000 barrels a day.

Motiva, a joint venture between Shell Oil and Saudi Aramco, plans to make a final investment decision this year on a project that will double the size of its 285,000-barrel-a-day refinery in Port Arthur.

And several investor groups are laying plans to build new refineries, including Dallas firm Hyperion Resources. Last week the company said it plans to spend $8 billion to build a 400,000 barrel-a-day refinery in Elk Point, S.D.

The large number of projects in the works suggest to industry analyst Paul Weissgarber, with A.T. Kearney in Dallas, that refiners see opportunity ahead, despite gripes about the current environment.

“Everyone,” he said, “would like to have just a bit more of the market.”

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