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Financial Times: Shell and Saudi Aramco put $7bn into US refinery

By Ed Crooks in London
Published: September 21 2007 20:35 | Last updated: September 21 2007 20:35

Royal Dutch Shell and Saudi Aramco are to invest $7bn in their refinery at Port Arthur, Texas, making it the biggest in the US, even though they expect margins in the industry to fall.

A shortage of refining capacity in the US has helped drive petrol prices up to over $2.80 a gallon at the pump, and sent refiners’ margins soaring.

The shortage has been created by a lack of investment that has lasted for decades and exacerbated by problems such as the explosion at BP’s Texas City refinery in 2005. A new refinery has not been built in the US for more than 30 years.

The Port Arthur investment by Motiva, the Shell/Saudi Aramco joint venture, will more than double the refinery’s capacity. It will be able to process more than 600,000 barrels a day of crude, but will not come on stream until 2010.

The average refining margin on the US Gulf Coast has risen from $9.20 per barrel processed in 2005 to $19.95 per barrel in the first half of 2007.

But the current high margins, often described as a “golden age” for the industry, are not expected to last, as new capacity comes into operation in Asia and the Middle East.

Rob Routs, Shell’s executive director of donwstream, said: “To compete in a period of lower margins, we have got to have large and complex refineries.”

The expanded Port Arthur refinery will be able to process heavy and sour oil from Saudi Arabia or Canada’s oil sands, where Shell is investing heavily.

Motiva’s additional production is likely to displace some of the petrol now imported into the US. Imports are running at about 1m barrels a day.

Viren Doshi of Booz Allen Hamilton, the consultancy, said the investment had worrying implications for European refiners, especially if US demand weakens as a result of the rise of bio-fuels and more fuel-efficient cars.

“A number of European refining companies rely on exports to the US,” he said. “Sooner or later demand is going to plateau, and the biggest doom and gloom scenarios will be in Europe.”

Shell, along with other big oil companies including BP and ExxonMobil, has been selling some of its European refineries.

Shortages of steel, equipment and skilled staff have created delays and sent costs soaring for many refinery projects.

However, Mr Routs said Shell had delayed making its announcement until it had “a firm grip on costs and timetables”, and he was “confident” the project could be brought in on time and on budget.

Oil companies have been reluctant to invest in what has traditionally been a low-margin and unprofitable business. When they have tried to add to refinery capacity, they have often faced opposition from local communities to refinery developments.

Mr Routs said Shell did not expect local opposition in Port Arthur, saying: “The community has been very intensely involved, and supports our investment.”

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