Valero is looking at selling its Aruba Refinery (currently shown de-rated slightly to 285,000 BPD capacity) because of power supply (which would only take a Petcoke Gasifier / Cogen to solve) and although this article claims does not produce gasoline – it is wrong, Valero’s CEO had said that gasoline wouldn’t make US spec’s. Valero is Aruba’s primary source of gasoline and diesel as well as the two airport’s jet fuel. But Aruba does produce a lot of intermediate refinery products and Bunker / fuel oils that Valero upgraded & used to eliminate 3rd party purchases from its US Gulf Coast refineries.
The purchased capacity of Aruba for Valero was 315,000 BPD (actual capacity seldom ran above 240 MBD due coker downtime) and it paid total $675 million (less ~$2150/BPD capacity) and then spent another $670 million to upgrade/revamp the coker capacity, crude capacity and other downstream units (so total would be $1.345 billion or $4270/BPD capacity). The stated replacement capacity was estimated to be worth $2.4 billion at the time of its purchase in 2004 which was at very low end of capacity cost ~$8000/BPD. Valero had purchased (hence bragging rights) all of Premcor’s refineries for an average less than $9,000 BPD capacity that ranged from 10-40% of a refinery replacement value. It is not surprising therefore that Valero has been sorting through its operations to capitalize on today’s high expansion cost that range from $22,400 – 24,000/BPD capacity and avoid both expansion cost and lost revenue for accidents and shutdowns. Especially for those refineries like recently sold Lima that required large & expensive upgrading (Lima sold for $1.9 billion or ~$11,800/BPD capacity for the 161 MBD sweet crude refinery but the $1.0-1.5 billion investments to expand crude & coker for Canadian Bitumen take it to full $22k/BPD capacity replacement cost). It would appear that these similar evaluations have Valero management looking at Aruba and the other 4-5 refineries up for consideration.
But my thoughts would be that the expansion value greatly understates true value of refining capacity in a country where Environmentalist control EPA outcomes & make new Greenfield refineries impossible to build – and so there isn’t a real value for irreplaceable capacity. Aruba doesn’t quite fit under this since it is one of two Caribbean coking refineries – but it has significant future opportunity and would be better suited to partial divesture or tolling approach for crude producer – Petrobras comes to mind (since they recently bought Japanese refinery & the Crown Houston coking refinery). There is nasty overhang with Aruba tax as I remember – the refinery has tax exemption for Valero until 2011 and then jumps back to 28% level – perhaps this is part of negotiating strategy as well?
One last note Valero had noted an earnings opportunity of $1 billion over next 5 years from increased safety/operating focus and keeping refineries up and operating and by avoiding safety/fire incidents. The Valero fire this year was said to represent some $586 million from lost sales in 2007.
Regards
Charlie Randall
