Friday, February 6, 2009

U.S. Refining Update

I read this all the time: 'The U.S. has not built a new refinery in the last 30 years.' This comment was fairly prevalent last summer (2008) when gasoline prices were upward of $4.50 per gallon. The fact is that the U.S. refining companies have built no new, grass-roots refineries since 1976. But, as EIA data shows, refining capacity has increased steadily over the years. This is due to incremental capacity additions to existing refineries. Now, February 2009, there are a few major expansion projects underway, one of which is at Motiva's refinery in Beaumont, Texas. The project is having a bit of trouble lately, and on January 13th just past, they announced a layoff of certain construction workers and a re-evaluation of the schedule in light of the current low refining margins. Marathon, ConocoPhillips, Valero and Sunoco each said they are proceeding more slowly on refinery upgrade and expansion projects, according to an article Feb 4 in the Houston Chronicle. In Los Angeles, California, Alon has slowed its project to combine two refineries into one, and add a diesel-production unit. The engineering work is complete. The Alon refinery is to take advantage of relatively high diesel prices and demand, even during the current economic downturn. All these are predictable moves in an environment where refining margins are low, and gasoline demand is fairly weak. Another factor is international competition, from a very large refinery in Mumbai, India. The Reliance Industries refinery has a capacity of 580,000 barrels per day, and is slated for export. I do not know if the gasoline and diesel products from Reliance Industries meets US specs, or California specs, but there is a good chance that the flow of refined products will change. We may find it cheaper to import gasoline than to produce it ourselves.

Another interesting note affecting California refineries, is the lack of water in the state potentially causing a shortage of bio-fuel blending components for gasoline and diesel. Under California's Global Warming Solutions Act of 2006, aka AB 32, the state's refineries must blend increasing amounts of "low-carbon" fuel, meaning bio-fuel. What could be a good opportunity for California farmers will now benefit others as these blending components are purchased from other states.

Roger E. Sowell, Esq.

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