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Expanded Oil Refinery Idles

After $10 Billion Upgrade at Shell-Saudi Plant, Glitch Puts New Section on Ice

June 13, 2012


HOUSTON—Two weeks ago, the top brass of Royal Dutch Shell RDSA +0.30% PLC and Saudi Arabia’s national oil company met in Texas to celebrate a $10 billion expansion that made their joint-venture refinery the largest in the U.S.

Today, the new sections of the Motiva Enterprises LLC refinery in Port Arthur are sitting idle, victims of a mechanical failure last weekend that is costing an estimated $1 million a day in lost revenue and helping to drive up gasoline prices. The new facilities could remain shut for several months, bringing down the refinery’s capacity to process crude from 600,000 barrels a day to its pre-expansion level of about 275,000 barrels a day.

The mishap comes in the midst of the U.S. summer driving season, when drivers’ demand for fuel is at its peak. And it adds costs to a project that was already more than $3 billion over budget and years behind schedule.

“The project cost $10 billion, and it’s not earning any money right now, at the most advantageous point of the year,” said Sam Margolin, an analyst at Dahlman Rose & Co.

Motiva, a joint venture between Shell and state-controlled Saudi Arabian Oil Co., known as Saudi Aramco, revamped the refinery to make it one of the largest in the world. The expanded facility was designed to be a hub for the production of fuel for U.S. drivers and Latin American economies, and a strategic investment strengthening Saudi Arabia’s energy ties with the U.S., its most important ally. One of the refinery’s towers, 32 stories tall, dwarfs every other structure in Port Arthur, a small Gulf Coast town.

Starting up new capacity can lead to shutdowns, but early reports of the severity of the mechanical failure at Motiva indicate the breakdown might be especially burdensome.

Motiva’s newly installed crude-distillation unit—a device that separates incoming oil into streams to make different types of fuel—caught fire as fuel production was being increased at the refinery. Repair crews later found corrosion, a person familiar with the refinery’s operations said, adding that it could take months to repair the unit, one of two at the refinery.

Assuming the expanded refinery was going to run at 80% of capacity, Motiva can expect $1 million a day in lost revenue, said Fadel Gheit, an analyst at Oppenheimer & Co. And repairs are likely to be expensive, Mr. Gheit said. “They are not going to patch it up with scotch tape.”

Motiva is investigating the cause and extent of the mechanical problem, said spokeswoman Emily Oberton, who added: “We will resume normal operations as soon as it is appropriate to do so.”

Representatives for Shell and Saudi Aramco didn’t respond to requests to comment.

The outage helped spur Gulf Coast spot-market prices for wholesale regular gasoline to $2.73 a gallon on Wednesday, up five cents from Friday. It also added support to gasoline prices at the New York Mercantile Exchange, which closed at $2.66 a gallon Wednesday, down from $2.69 Friday amid economic worries but on the rebound since Monday because of signs U.S. fuel demand is increasing, said Gene McGillian, a broker at Tradition Energy.

Meanwhile, Saudi Aramco is reviewing what to do with the huge amounts of so-called sour crude oil it has shipped to the refinery, said a person familiar with the company. The Saudis had agreed to supply Motiva with all the sour crude it needed for several months while it tested its expansion, because using only one type of oil made the start-up easier. Now the specter of millions of barrels of excess unrefined crude is having an impact on local oil prices in the U.S. Gulf Coast, one trader said.

On Wednesday, prices for Mars crude, a sour crude variety produced in the deep-water Gulf of Mexico, sold at about $91.97 a barrel, down $4.23 per barrel from Friday.

Write to Ben Lefebvre at [email protected]

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