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A $7 Billion Expansion Updates Texas Refinery: Aramco, Shell to Double Size Of Historic Plant

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The expansion will require driving 50,000 concrete piles into the swampy soil.

THE WALL STREET JOURNAL: A $7 Billion Expansion Updates Texas Refinery

Aramco, Shell to Double Size
Of Historic Plant,
Modify It To Handle
‘Nastiest Crudes’
April 7, 2008; Page B1

PORT ARTHUR, Texas — Oil companies are traveling farther and drilling deeper to find that next barrel of crude. But the oil they’re unearthing is increasingly gooey, acidic or laced with sulfur.

That’s why two of the world’s largest oil companies — state-controlled Saudi Arabian Oil Co., known as Saudi Aramco, and Royal Dutch Shell PLC — have begun plowing an expected $7 billion into the most ambitious U.S. refinery project in more than 30 years.
Doubling the size of the storied Motiva refinery, whose roots go back to the days of the famous Spindletop gusher of 1901, will turn the sprawling plant here on the Gulf Coast into the largest crude refiner in the U.S. But the bigger plan is to make the Port Arthur facility the best equipped in the country to digest the world’s most challenging oil — the stickier, high-sulfur stuff that sells at a discount to the light, sweet crude that first put Texas on the map.

“This is all about handling the nastiest crudes,” says Forrest Lauher, a Motiva engineer who is in charge of an expansion project that will drive 50,000 concrete piles into the swampy soil here and consume more than 27,000 tons of structural steel and 450 miles of pipe. The refinery, now capable of handling around 275,000 barrels of oil a day, will grow to a capacity of 600,000 barrels a day by 2010.

From Asia to the U.S., refiners are bracing for increasing flows of heavier or more acidic crudes from the Middle East, Sudan, Brazil, Canada and Venezuela. Some of the logic is simple economics. The most easily refined light crudes, such as West Texas Intermediate, now sell for more than $105 a barrel. They yield the most high-value products, like gasoline. But the heavier, more troublesome grades go for sharp discounts. In recent months, Canada’s heavy crudes have sold for as much as $20 a barrel less than West Texas intermediate.

The Port Arthur project also reflects a longer-term reality as oil producers, many of them boxed out of the richest oil regions, such as Iraq, move to tap some of the least desirable pockets of crude. Heavier grades of oil now account for around a quarter of daily world-wide supplies, but some forecasters say that figure could jump to more than half by 2030. Refiners must be ready to turn that crude into usable gallons of gasoline, diesel and jet fuel.

Shell, which owns half of Motiva alongside Aramco, is now investing in heavy-oil projects in regions ranging from South America to Canada, where the company claims 20 billion barrels in heavy-oil reserves.

But the expansion is more important strategically for Aramco. In three years, Aramco plans to open the spigots on what could be Saudi Arabia’s last giant reservoir of crude: the Manifa field that stretches from the kingdom’s east coast into the Persian Gulf. The field, first discovered in 1957 but later mothballed, is slated to pump 900,000 barrels a day of heavy Arabian oil.

With Port Arthur, Aramco is moving to turn a potential weakness into a commercial strength by ensuring that its shipments of heavier crude have a guaranteed home. As part of the expansion deal, Aramco has pledged to provide at least half — and possibly all — of the heavy crude the new venture will need for the next 20 years. That will come on top of the 400,000 barrels a day of Saudi crude that Aramco already ships to Port Arthur and Motiva’s two other area refineries. Aramco now ships around 1.4 million barrels a day to the U.S., or roughly 15% of the kingdom’s total production.

“The advantage that we provide … to a venture in the U.S. is a long-term guarantee of supply, which no one else can do,” says Ziad Labban, chief executive officer of Saudi Refining Inc., an Aramco subsidiary based in Houston.

Boosting its refining foothold in the U.S. is central to another Aramco objective. Long seen as mainly a crude-oil supplier, the Saudi oil giant is pushing to gain more control over the entire supply stream, from the oil well all the way to the gas pump. The aim is not only to increase profits, but also to reduce bottlenecks along the way that have helped to drive gasoline prices in the U.S. to record highs.

“Our concern is always reliability of supply, and that reliability has to be end to end,” says Mr. Labban. “We have to do that to protect our market.”

Aramco is now bulking up its refining partnerships in the U.S., South Korea and China, as well as its refineries at home, some of which are targeting the export market. In the U.S., Motiva gives Aramco a 50% interest in more than 8,000 Shell service stations scattered across 22 states from Texas to Massachusetts.

Mr. Labban says it’s extraordinary that U.S. refining capacity has hardly budged in the past 30 years. The country’s 149 refineries can now handle 17.4 million barrels of crude a day. In 1978 there were twice as many refineries able to handle nearly the same amount of crude. To make up the difference, the U.S. last year imported an average of 3.4 million barrels a day of products like gasoline, diesel and jet fuel.

“That is exactly what the problem is in the U.S.,” says Mr. Labban. “There is a shortage, and so there are huge imports of refined products.”

Shell officials say that along with the heavy Saudi crude, the expanded Port Arthur refinery may also take on large volumes of Canadian heavy crude shipped down from the oil sands of Alberta, where Shell, Chevron Corp. and Marathon Oil Corp. are active. But that will depend on whether various companies move forward with ambitious plans to snake a pipeline down to Texas.

The big Motiva expansion comes as many U.S. companies are looking to refocus their refining operations. San Antonio-based Valero Energy Corp., the country’s largest refining company, says it is considering selling five of its 17 U.S. refineries. But Valero is also deeply involved in its own multibillion-dollar expansion in Port Arthur to make its plant there more capable of handling more heavy, sour crudes.

William Welte, Motiva’s chief executive, says it makes sense to prepare to digest more of the nastier crudes. “We’re not building this for 2010 or 2015,” he says. “This is a long-term asset, and the heavy sours are going to be there for a long time.”

Write to Neil King Jr. at [email protected]
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