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Houston Chronicle: New laws leave oil refiners uncertain

Jan. 6, 2008, 11:58PM

Some rethink expansions as legislation aims to reduce gas use

Copyright 2008 Houston Chronicle

Refinery expansion is continuing, but some refiners are putting plans on hold while they review the potential effects of new energy-conservation legislation and other market factors.

The status of some big projects:


• Motiva: Port Arthur

• Marathon Oil: Gravelly, La., and Detroit

• Valero Energy: St. Charles, La.

• Chevron Corp.: Pascagoula, Miss.

• ConocoPhillips: Wood River, Ill.

Under review/postponed

• Valero: Port Arthur and Texas City

• ConocoPhillips: Sweeny and Alliance, La.

Oil refiners may reconsider plans for some refinery expansion projects in 2008 in response to new energy legislation that could reduce gasoline use in coming years, industry groups and refiners say.

While expansion projects already under way won’t be affected, those in the early planning stages could be delayed or canceled, they said — continuing a pullback that began last year amid rising costs for refinery additions and uncertainty over future gasoline demand.

Within 10 years, U.S. refiners could be producing less gasoline than they are today as a result of the new energy legislation, which calls for stricter auto gas mileage standards and more ethanol output, said the National Petrochemical and Refiners Association, a trade group in Washington.

If that’s the case, “it doesn’t really make sense for refiners to spend billions of dollars expanding to meet a demand that’s not going to be there,” said Bill Day, spokesman for San Antonio-based Valero Energy Corp., the nation’s largest refiner.

But industry critics say refiners are using new energy policies as an excuse to keep refining capacity tight and their profits high. They claim refinery additions will still be needed to feed growth in gasoline and demand, as well as bridge a shortage in refining capacity today that is being filled by gasoline imports.

“Even as the legislation is implemented, we will have a shortfall of refining capacity for the entire lifetime of those specific energy goals,” said Mark Cooper, director of research at the Consumer Federation of America in Washington.

While a new U.S. refinery hasn’t been built in three decades, U.S. refiners have been expanding facilities in recent years to keep pace with fuel demands and to take advantage of one of the most profitable periods in the industry’s history.

Early last year, refiners were so confident their winning streak would continue that they told the Energy Department they planned to add 1.6 million barrels per day of new refining capacity, an increase of about 10 percent and enough to produce an additional 37 million gallons of gasoline every day.

New capacity

The nation’s 140 refineries have about 17.5 million barrels per day of capacity.

But by the summer, with material and labor costs skyrocketing and threats emerging on the policy front, several refiners canceled projects. Now the Energy Department estimates new projects planned by 2012 will add about 1 million barrels per day of new capacity.

The drop, while significant, brought expansion plans closer to their level of the last decade — an average annual capacity expansion rate of about 200,000 barrels per day, said Cindy Schild, manager of refining issues at the American Petroleum Institute, an industry trade group.

But the uncertain demand picture for gasoline, resulting from the new energy laws, may well push more projects off the table, said Tim Donohue, vice president at management consulting firm Booz Allen Hamilton’s Houston office.

“I think there will be further declines,” he said.

Signed by President Bush in December, the Energy Independence and Security Act of 2007 requires fuel economy standards for cars and light trucks to increase to an average 35 miles per gallon by 2020, an increase of 40 percent. It also boosts a mandate for renewable fuel production, mostly ethanol, to 9 billion gallons by 2009 and to 36 billion gallons by 2022. Current production of ethanol is about 5 billion gallons. The increased ethanol supplies will be blended with gasoline to extend the nation’s fuel supply.

Taken together, the two measures are projected to reduce gasoline consumption 20 percent by 2017, consistent with a target President Bush set in his 2007 State of the Union speech.

Even if they hit their mark, however, there is still a business case to be made for adding refinery capacity, Donohue said. Fuel demands likely will continue to outstrip U.S. refiners’ ability to meet them, even after the new energy laws are enacted, he said.

There are also doubts new ethanol targets can be achieved given the limitations of corn-based ethanol and still unproven technologies for making ethanol from non-food crops and agricultural waste, he said.

$7 billion project

Several major refiners recently have indicated they will move forward with expansion projects despite headwinds facing the sector.

Last month, Motiva, a joint venture between Royal Dutch Shell and Saudi Arabia’s state-owned oil company, broke ground on a $7 billion project to double the size of its Port Arthur refinery to 600,00 barrels per day, making it the largest in the nation. The project should be finished by 2010.

Others, however, remain in flux.

Last year, Valero postponed a 22,000-barrel-a-day expansion of its refinery in Texas City, and is still in the “talking stage” of a possible addition at a Port Arthur facility, Day said.

Charles Drevna, president of the National Petrochemical and Refiners Association, said he would not be surprised if more companies took a “long hard look” at refinery expansion projects in light of the changing regulatory landscape.

“There’s only so much capital to go around on these types of things,” he said.

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