Reuters: U.S. oil refinery plans may hit Europe fuel exports

Thu Oct 4, 2007 12:19 PM ET
By Ikuko Kao – Analysis

LONDON (Reuters) – An expected wave of expansions at United States refineries could reduce demand for fuel imports from Europe, which supplies a tenth of U.S. gasoline, traders and analysts say.

The new investments are likely to be triggered by Royal Dutch Shell’s decision last month to expand its Port Arthur plant in Texas, a project the company described as equivalent to building a new refinery, the first to be built in the United States for 30 years.

“There is plenty of room for others to follow suit,” U.S. based analyst Peter Beutel of Cameron Hanover said.

Shell said in late September it had made a final decision to invest $7 billion to add new 325,000 barrels per day of crude distillation capacity at the Port Arthur plant, jointly owned by Saudi Aramco, by 2010.

The announcement came as U.S. crude prices hit record highs just below $84 a barrel and after a spate of recent announcements of new refinery projects in the Middle East and Asia, which will able to produce fuel more cheaply than Europe.

European oil traders fear the projects may harm their gasoline export business.

Gasoline exports from Europe mainly to the U.S. Atlantic coast totaled about 1 million bpd, which is more than 10 percent of driving demand, averaging 9 million bpd, in the world’s top consumer.

“The flow will change. More and more new capacity seems to come onstream,” a European gasoline trader said.

“If the harbor can get more gasoline from the Gulf, most likely it will reduce gasoline imports from Europe,” another European trader said.

Shell will also build a new 95,000 bpd delayed coker to process very heavy grades of crude oil at Port Arthur, along with other secondary units.

These include hydrocracking and hydrotreating units to suck more value-added lighter products, including gasoline and distillates, from heavier products such as vacuum gas oil.

Cameron Hanover’s Beutel said that the expansion plans might not reduce imports if demand for energy continues to rise strongly in the United States. At present the gap between refining capacity and demand means the United States has a shortfall of more than 3 million barrels per day.

“By the time this new capacity comes on line, that demand growth will have increased to absorb it,” he said. “We would need to add about one and half million bpd to really have a big effect on future supply.”

DIRECT CRUDE DEMAND

Energy consultancy Wood Mackenzie said it was reviewing its U.S oil supply-demand outlook in face of Shell’s announcement.

Traders said new refining capacity may lower domestic fuel prices but it may mean an increase in direct demand for crude oil. The Organization of the Petroleum Exporting Countries (OPEC) has argued that the lack of refining capacity has led to record high prices.

“OPEC is right in a way. Lack of refining capacity has led to higher product prices, which has indirectly affected crude prices,” an oil trader with a bank says.

“But building new crude distillation towers simply means an increase in direct demand for crude oil.”

Shell’s spokeswoman in London has said the company has not decided if it plans to increase crude oil intake from any external producers after the expansion, including its partner Saudi Arabia, or use a heavy feedstock from its Athabasca Oil Sands Project in Canada.

Asian traders have said Saudi Arabia is likely to boost supplies to the United States.

The OPEC kingpin is likely to lose its market share in Japan, the second largest crude oil importer after the United States, as Abu Dhabi has bought into Japan’s fourth largest refiner.

U.S. crude refining capacity totaled about 17.455 million bpd, BP’s Statistical Review of World Energy 2007 shows.

The International Energy Agency, the energy adviser to 26 industrialized countries, expects U.S. oil demand to increase by 25,000 bpd from last year to 20.92 million bpd in 2007 and by a further 30,000 bpd to reach 21.22 million bpd in 2008.

The agency does not provide outlooks beyond 2008.
 
© Reuters 2007. All rights reserved.

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