Heating oil sulfur rules doom refineries -Campbell
Tue Oct 11, 2011 12:54pm EDT
— Robert Campbell is a Reuters market analyst. The viewsexpressed are his own. — By Robert Campbell
NEW YORK, Oct 11 (Reuters) – New curbs on sulfur content inheating oil in several Northeastern U.S. states are a majorfactor behind the impending closure of as many as threeregional oil refineries. From the middle of next year, heating oil sold in New Yorkstate will be restricted to a sulfur content of 15 parts permillion, down from today’s 2000 ppm specification. This means that in New York, heating oil, a formerly easyproduct to make, will become very similar to ultra-low sulfurdiesel, a more costly product. Other jurisdictions are set to follow later, but New Yorkstate’s early move may prove decisive for the whole market.
Although heating oil is a declining market as consumersswitch to natural gas, it has played a key role forcash-strapped refiners as a dumping ground for higher sulfurdistillate streams that can no longer find a place in thediesel pool. Nearly 40 percent of East Coast refiners’ distillate fueloutput last year was high sulfur. Without investments indesulfurization capacity to upgrade these streams, refiners arefacing a big hit to profitability.
So as the heating oil specifications tighten, tens ofmillions of dollars in investment will be needed just to stayin business. Of course today the three refineries up for sale –twoSunoco Inc plants in the Philadelphia area and a nearbyConocoPhillips facility– are already losing money, sothe new investment would merely allow them to continue losingmoney at roughly the same pace as today.
Currently Sunoco’s two refineries do not have any dieseldesulfurization capacity, according to the U.S. government.Some other units may be suitable for conversion to dieseldesulfurization. Conoco’s refinery has some diesel desulfurization, but lessproportionally than other sweet crude oil refineries,suggesting that it too would need investment.
So anyone buying either of these refineries would have tobe ready to continue to absorb the current rate of losses,invest in new desulfurization capacity and be prepared to dealwith the gradual decline in U.S. oil demand and ever morecostly light, sweet crude.
Impossible? No, nothing is impossible. But what is all butcertain is that at least two of these refineries will close.After all there can only be a few buyers brave, or foolhardy,enough to try to turn these plants around.
NEW YORK LEAD
The real problem is the New York deadline. Oil refinershave warned it will cause them problems, prompting somejurisdictions to slow down their transition plans. But though some states, such as New Jersey, have opted fora more gradual transition, the market is aiming for a fastershift. Critically, major pieces of infrastructure are jumping thegun. The Buckeye Partners LP pipeline, a major regionalshipper, will restrict sulfur in heating oil in parts of itssystem from April.
Although higher sulfur heating oil will remain deliverablein other parts of the Buckeye system, past experience showsthat lower sulfur specifications tend to crowd out other gradesas infrastructure operators try to keep operations simple. Given these challenges it is hard to see buyers for thethree refineries up for sale or closure emerging. Even PBF Energy, Tom O’Malley’s latest contrarian refinerybet, is unlikely to step in. After all, having bought two EastCoast refineries at knock-down prices he has the most to gainif his competitors go out of business.
And he has his own problems. O’Malley told Platts inSeptember that neither of his two East Coast refineries canmake heating oil able to meet the stringent specifications setto go into effect in New York. Upgrading the two plants could cost $700 million and takeuntil 2015, Platts reported. It would be too big of a stretch to blame the heating oilrules for these potential closures. At best they have onlyaccelerated an inevitable process. Other public policies, such as mandatory biofuels blendsand higher fuel economy ratings for passenger cars, are doingmore to kill off refineries. But the heating oil question does highlight risks forrefiners. Once heating oil joins the low sulfur club, jet fuelmay be similarly targeted. New rules due to be fully implemented by 2015 ban highsulfur bunker fuel in ships in most North American waters. Indeed, these changes are not invisible to refiners but, atleast on the East Coast, many chose to not upgrade theirfacilities due to cost considerations. The market will now pay the price for these decisions inhigher cost fuels.