March 24, 2010 at 11:05 am #2731
Better Profit Ahead for Refiners Using Heavy Crude, Valero Says
By Paul Burkhardt
March 22, 2010 (Bloomberg) — Refineries running heavy crude may have better profits later this year as the economy improves, but margins for plants with coker units will take longer to recover, Valero Energy Corp.s chief executive officer said.
In the last year, this heavy sour discount has narrowed, said Bill Klesse, CEO of Valero, the largest U.S. independent refiner, in remarks yesterday at the National Petrochemical and Refiners Associations annual meeting. We see that discount staying in this range or improving some over the next few months.
Heavy, sour oil typically sells at a lower price because they are more expensive to refine into valuable products such as gasoline and diesel fuel. Refineries that have invested in equipment needed to process these grades benefit when the discount for heavy crude widens.
Supply of the sour oil in the U.S. has declined as output of Mexicos Maya grade has fallen and Arab heavy production has been reduced in the Middle East, along with changes in Venezuelan imports, he said.
You have to get the world economy going so that the Middle East Arab heavies get back into the market, Klesse said.
The Organization of Petroleum Exporting Countries slashed production quotas by 4.2 million barrels a day in late 2008 to support prices as a global recession cut oil demand. Production of heavy crudes will increase if OPEC raises output.
Increased production from other sources will also widen the discounts for heavy crude.
Colombias producing more, we have some heavy oils coming out of Brazil ultimately, he said. The Canadian production is still there. It will happen, it may be slow.
For plants running sour crude, you get a higher margin, said Alan Gelder, Vice President for Downstream Oil at Wood MacKenzie Consultants Ltd. in Houston. The question is, will it be that now those cokers make an attractive return? Thats much more difficult.
A coker uses thermal processing to convert heavy refinery streams, such as vacuum bottoms, into light products such as naphtha and heating oil, while reducing much of the feedstock to solid carbon.
During the last two years, 300,000 barrels a day of coking capacity was added to existing refineries, with a significant proportion of this going to North America, Gelder said.
More high-sulfur No. 6 fuel oil is needed in the market to see a recovery in coking, Klesse said. Fuel oil can be processed in a coker, or used as a fuel in power plants and large ships such as oil tankers.
Refiners throttled back rates in 2009 as demand for gasoline and diesel plummeted, tightening supplies of fuel oil.
The price of high-sulfur fuel oil in the Gulf Coast spot market rose to an $8.15-a-barrel premium over West Texas Intermediate crude in February 2009, after OPECs output cuts took effect. The fuel has averaged a $15.25 discount to WTI since the beginning of 2002, according to data compiled by Bloomberg. The discount was $11.87 today.
Valero operated its cokers at around 50 percent at one point last year, Klesse said. Getting out two or three years, I think theres still value in coking. Last Updated: March 22, 2010 18:17 EDT
March 24, 2010 at 11:14 am #5716
This article on Valero CEO & Woodmac EVP & thier coker economic comments have some poor statements in them? Give them the benefit of the doubt & perhaps Bloomberg’s Paul Burkhardt shortened some key statements – but Bloomberg has good track record for not doing that.
Perhaps it is some insight why Valero has more coking units down for economic reasons than lot other Gulf refineries and doesnt sound like they are getting sensible coking economic advice from Woodmac either.
Cracking refineries making fuel oil or asphalt dont make better margins that coking refineries (outside the blip Feb 2009 where Citigroup & others were speculating on Crude & Products loading tankers to float hoping for big rise prices to offset demurrage…..like they are doing now).
You can see this is recognized in quote Fuel oil runs at $12-15 discount to WTI. They also stated that part of heavy differential problem impacting spreads are problems with Maya & Venezuela crude supply (that I have been mentioning all along).
You also have give points to Woodmac for stating plants running sour crudes make better margins & for recognizing that while they may have better margins its not likely they will have good returns on new cokers (which are justified on +$12/Bbl heavy sour spread) but once steel is on ground its moot point & companies ride re-occuring cycle untill it comes back. (But $1-3/Bbl beats no dollars on shutdown unit).
After these points both sort catch the stupid train on miss-information. Big volumes of Heavy sour just are not going to return/come into US market from the Mideast & even if they did it would be too expensive run (Mid East switched to Argus Sour Crude Index vs. WTI discount this year & Saudi’s would be asking for premium over WTI….that wont work). Besides between all large MidEast Refinery expansions to run heavy crude & all new world-class eager China/India/Asian refineries in line for supply … the switch to Asia & East for MidEast Crude has become fact life. West Africa & its Crude is clearing point for any crudes going to West & US markets. Both are not Geopolitical or strategic – just simple good freight economics that offer best netback for producers & consumers.
You also dont need to get world market going for US Refinery Margins to recover – all that needs to happen is for Mexico & Venezuela to bring their heavy crude production back online (which they HAVE to do ….. or go broke since their countries government income is from Pemex & PDVSA – not taxes). The resources and reserves are there – its just bad/stupid political decisions standing in the way.
Now for Valero CEO statements – as all coker devote’s know, once you put diesel in resid to make it Fuel oil for power plant or bunker, it becomes too expensive for coker feedstock. And if the margins are crap for coking refineries then they are double crap for cracking and simple refineries (Valero should know they are selling all of theirs – just like most Europe) – so these types of refineries are not likely to be flooding the market with resid bottoms to improve coker spreads.
I dont think folks should be looking at either of these guys quotes in this article to understand issues going on with coking refineries now. There are points and truths but they are offset by some bad premise assumptions on drivers/sourcing.
One thing that is clear worldwide there is now an oversupply of refining capacity that needs to be rationalized & it is if you’re watching the sale & shutdown announcements. The small & simple refineries worldwide & in the US with less than 75-100,000 BPD charge capacity are first targets to go. Few if any Coking refineries will ever be anything but temporary candidates on that list (name change to new owners) …… with exception of lemons like Valero has in Aruba & Delaware where you have coker in Aruba but no FCC or gasoline making capability and fluid coker in Delaware that should have been replaced years ago when it failed to operate as designed. Shutting down its other coking refineries for Economic reasons is just outfall of making bad crude supply decisions (ie passing on EnCanada JV which ConocoPhillips later acted on for both Woodriver & Borger).
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