Shell Montreal refinery victim of slow demand

NATHAN VANDERKLIPPE

CALGARY — From Friday’s Globe and Mail Published on Friday, Jan. 08, 2010 12:00AM EST Last updated on Friday, Jan. 08, 2010 2:56AM EST

Shell Canada Products Ltd. is closing its Montreal East refinery, making the 76-year-old plant the latest victim of the huge losses piling up among North American refiners.

Shell will convert the refinery, which employs 500 full-time personnel and up to 400 contract workers, into a terminal to distribute gasoline, diesel and aviation fuels, which industry observers say will likely be imported from Europe.

The company’s decision comes in the midst of a tumultuous rationalization of the refining industry. The global recession and new fuel-efficiency regulations have brought a sudden decline in demand for transportation fuels, creating extraordinarily tight – and, over the past year, often negative – refining margins. Some observers have called on the industry to shutter as much as two-million barrels a day of refining capacity to rebalance supply with demand.

Built in 1933, the Montreal East refinery grew from an initial 5,000-barrel-a-day plant to a 130,000-barrel-a-day operation that pumps some $200-million a year into the Quebec economy. Shell invested $150-million into the operation in 2002 to make it capable of producing low-sulphur gasoline, but said yesterday it no longer fits in with the company’s long-term strategy.

It is the second major Canadian refinery to close, after Petro-Canada closed its 80,000-barrel-per-day Oakville, Ont., refinery in 2005.

With new chief executive officer Peter Voser at its helm, parent company Royal Dutch Shell PLC has undergone a global review of its portfolio aimed at boosting profits and culling lower-performing assets. It has also reportedly entered into talks with India’s Essar Oil to sell one British and two German refineries.

Shell spokesman Larry Lalonde said it will likely take “about a year” to convert the Montreal refinery to a terminal. The company told workers it will keep the plant running until “more becomes known in the coming months.”

Montreal East will be at least the fourth refinery to fall victim to declining demand in the past four months. Late last year, Valero Energy Corp. closed a 210,000-barrel-per-day refinery in Delaware City, Del., which had been losing $1-million (U.S.) a day. Western Refining Inc. closed a small refinery in New Mexico last November and Sunoco Inc. shut down operations at its 145,000-barrel-a-day Eagle Point refinery in New Jersey in October.

But experts say the industry needs to cut much deeper to ready itself for worse days ahead, with U.S. motorists – a major driver of the continent’s refineries – expected to burn 8 per cent less gasoline between 2006 and 2018.

“Certainly, it is a positive from the industry point of view that [Shell] is going to shut the refinery and turn it into a terminal,” said Ann Kohler, a New York-based analyst with investment bank Caris & Company. But “we need to see one-million barrels of capacity or more be permanently closed.”

Ms. Kohler said companies will close refineries that are inefficient, or not closely tied into their crude production or gasoline marketing operations. But the industry faces a dilemma: Refineries that currently face the worst economics are those that process the heaviest oils. It is those refineries, however, that are most likely to be needed in the future, thanks in part to growing production from the Alberta oil sands.

Analysts said it is unlikely other Canadian refineries, which are more financially robust, will close. Montreal East faced tougher economics because of its age and a relatively simple design that made it unable to process certain types of petroleum, and consequently cut into profits.

The refinery provided about 7 per cent of Canada’s 1.8 million barrels of daily refining capacity. Montreal East primarily supplied the Quebec and Maritime markets. Its closure will leave behind just two refineries in Quebec, the Suncor Energy Inc. plant in Montreal and a Quebec City Ultramar refinery, which is owned by refining giant Valero Energy Corp.

Analysts said Shell will likely replace its refinery output with refined products imported from Europe, where a shift to diesel engines has left excess gasoline supply.

With files from Shawn McCarthy

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