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U.S. oil refiners face major cuts, slow recovery


Mon Jul 20, 2009 3:16pm EDT

By Rebekah Kebede and Erwin Seba – Analysis

NEW YORK/HOUSTON (Reuters) – The recession-battered U.S. oil refining industry may be forced to eliminate more jobs and further curtail capacity in the face of limp demand, tighter U.S. environmental regulations and stricter fuel-efficiency requirements for automobiles.

In the coming months, more refiners may be forced to shut additional units and slash employee numbers due to dismal demand for petroleum fuels.

“You’re going to see some whole refineries taken down … we could see (refinery) runs, as a percent of capacity, drop several percentage points into the low 80s, and correspondingly you’re going to see some loss of jobs within the sector, unfortunately,” said Jim Ritterbusch, president, Ritterbusch & Associates in Galena, Illinois.

The looming capacity cuts for U.S. refiners could be made permanent as the sector faces more stringent environmental regulations, improved fuel efficiency and foreign competition.

The latest company to fall victim to the recession is Shell, Europe’s largest oil company, which announced last week it is mulling staff cuts at its refineries and chemical plants in Texas, Louisiana and Alabama to cut costs.

Among plants under the microscope are those Shell operates jointly with Saudi Aramco and a Deer Park, Texas, refinery operated with Mexican state oil company Pemex.

Shell’s announcement came less than a week after the European oil major said it may shut or sell its 130,000-barrel-per-day refinery in Montreal, which it has operated since 1933.

Refining margins are squeezed due to wilting fuel demand as the economic downturn wears on. U.S. refiners have already either cut run rates or shut units that are operating with poor margins. Others have laid off workers.

Independent refiners, as opposed to integrated companies that also produce crude oil, are particularly vulnerable given that they have no upstream operations to provide feedstock.

“It’s going to be very difficult for anybody that’s not vertically integrated to hang in there,” Ritterbusch said.

Several refiners have shut down processing units.

Valero Energy Corp (VLO.N), the largest refiner in the United States, has closed several units for economic reasons and is on schedule to shut its 275,000-barrel-per-day refinery in Aruba for two to three months.

In late June, Hovensa LLC laid off 270 contract works at its 500,000-barrel-per-day refinery in the Virgin Islands.

Some analysts say a rebound may be far off.

“We can see how weak margins are right now, and with inventories where they are and no real indication of any type of demand … it’s hard to see any kind of rebound in refining margins at all through the end of the year,” said Chris Barber, an oil market analyst at Energy Security Analysis Inc.

Experts warn layoffs could come at the expense of safety if worker fatigue increases at plants where staffing is reduced. A government investigation of the 2005 Texas City refinery explosion, which killed 15 workers, found cost cutting by BP Plc (BP.L) led to cutbacks in maintenance, training and workers at the plant.


Full recovery from the economic downturn may be stifled by an increasing focus on cutting oil consumption.

Aggressive efforts to make cars more efficient and use alternative fuels may put a ceiling on gasoline demand growth. As a result, some estimate that in the United States, gasoline demand is unlikely to return to 2007 levels.

“Public policy is so directed at reducing oil consumption … in a different era you have to rethink your investment priorities,” oil historian Daniel Yergin said.

Refiners are also concerned that a climate bill moving through Congress will hinder an already weak industry by raising pump prices and undermining demand.

“American refiners already face stiff competition in the fuels markets from overseas. The Waxman-Markey bill would only disadvantage American businesses to the benefit of foreign entities,” said Bill Holbrook, spokesman for the National Petroleum Refiners Association.

The bill would regulate greenhouse gases in a cap-and-trade system where polluters are either granted permits for emissions or must purchase them.

If increased environmental restrictions “put any more pressure on the simpler refiners, I think you are going to see a lot more consolidation just because it’s going to be costlier to produce at the clean levels that they need to produce fuel,” Barber said.

But others say that the climate bill, introduced by U.S. Reps. Henry Waxman and Edward Markey, does not go far enough in slashing the emissions blamed for worsening global warming.

(Editing by Jeffrey Jones)

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