July 28, 2009 at 2:24 pm #3044
Oil Refiner Margins Poised to Rise as Shuttered Plants Increase
By Aaron Clark and Barbara Powell
July 20, 2009 (Bloomberg) — Refiners from Germany to Hawaii are weighing plans to shut or sell plants amid the biggest drop in oil demand in almost three decades.
Petroplus Holdings AG told workers in Teesside, northern England, their jobs are at risk. Royal Dutch Shell Plc may sell or close two plants in Germany and another in Montreal. Total SA will dismantle 25 percent of Frances biggest refinery. Chevron Corp. is reviewing its Hawaii plant. Within five years, about 25 percent of capacity in North America and 30 percent of Europes will be idled, the International Energy Agency says.
Traders are buying contracts that appreciate as the so- called crack spread that reflects the return from breaking crude into gasoline, diesel and heating oil increases. Margins representing profits from making fuel will rise to $10.71 a barrel in July 2012 from $8.97 on July 17, futures prices show.
Survival is all about how competitive your refinery is, said Jacques Rousseau, an energy analyst for Soleil Securities Corp. in Vienna, Virginia. The initial response has been to ratchet back production but the longer you go breaking even or losing money, you have to start considering closures.
Refiners such as Valero Energy Corp. and integrated oil companies including Shell may shut or sell unprofitable plants because fuel demand dropped during the first global recession since World War II. One out of six in the U.S. probably will close by 2020 if U.S. carbon-reduction legislation passes and new, more efficient plants come online in India and China, according to the American Petroleum Institute, a Washington- based group.
U.S. companies are operating below the five-year average of 88.3 percent of capacity as fuel stockpiles swell. U.S. plants ran at 87.8 percent in the week ended July 10, and inventories of distillates were the highest in 24 years, Energy Department data show.
The industry is going to have to go back to running at 80 percent or lower, said Ann Kohler, a New York-based analyst with Caris & Co.
Global margins dropped to $4.98 a barrel in the second quarter compared with $8.25 a year earlier, according to BP Plc data.
In the U.S., the profit from turning three barrels of crude into two of gasoline and one of distillate reached $23.95 on May 17, 2007, a record going back to at least 2000, when crude was at $64.86 a barrel, data compiled by Bloomberg show. When crude reached a record $147.27 a barrel on July 11, 2008, the crack spread had fallen to $11.762, the data show.
Record Profits <CER notes – remember this is Gross because Net Profits didnt get any Oil companies a place on Fortune 500 Top 50 Net Profit rankings>
Valero, the largest U.S. refiner, had record second-quarter profits of $2.25 billion in 2007 when the industrys spread averaged $20.20 a barrel. Net income was down to $1.15 billion in the third quarter of 2008 when futures showed the margin averaged $13.11, according to data compiled by Bloomberg.
With the gap now lower, Shell, Europes biggest oil company, may shut, sell or convert plants that account for 8.8 percent of its global capacity, or 349,530 barrels a day. The Hague-based company is reviewing the Montreal, Canada, plant, its Hamburg- Harburg and Heide sites in Germany and a 17 percent stake in New Zealand Refining Co., Rainer Winzenried, a spokesman, said in a telephone interview.
Petroplus, based in Zug, Switzerland, said Feb. 5 it would sell the 117,000 barrel-a-day U.K. Teesside refinery or turn it into a terminal for shipment and storage by the end of the year. Total will reduce output at Gonfreville in Normandy by 25 percent to 12 million tons a year, and shut a fluid catalytic cracker, lowering gasoline output by 60 percent.
Chevron, the second-largest fuel producer in the U.S. West, in considering shutting in Hawaii and converting into a terminal. More stringent fuel specifications and growth in global capacity are forcing the company to study its options, said Al Chee, a spokesman.
I dont think there is going to be one aha moment where you are going to have all of this consolidation occur, said Kohler at Caris. Its more a gradual ebbing.
Flying J Inc. halted production at its 68,000 barrel-a-day Bakersfield, California, unit after filing for bankruptcy in December. The Ogden, Utah, company may close the plant, purchased in 2005 from Shell, which had planned to shutter it.
In addition to closures, companies may announce plans to temporarily idle units or entire plants for maintenance when the intent is to close them.
It wont be well advertised, you will have very quiet shutdowns, some will say for maintenance, which nobody in the industry will believe, said James Cordier, the founder of OptionSellers.com, part of Liberty Trading Group in Tampa, Florida.
Aruba Refinery Idle
Valero said that it plans to keep its Aruba refinery closed for months, starting July 16, because of falling margins. The San Antonio-based company will assess economic conditions in two to three months and then decide whether to restart at the 275,000 barrel-a-day plant, according to Bill Day, a spokesman.
The increase in profit margins foreseen in futures prices may not occur if newer plants in India, China, Brazil, Russia and the Middle East come online before older ones in Europe and the U.S. are closed.
Global capacity will increase by 7.6 million barrels a day between 2008 and 2014, with 54 percent of the new capability in Asia, the IEA said June 29. Demand for oil is projected to rise by 3.2 million barrels a day, the Paris-based organization said.
While global production can expand, U.S. demand will grow at a slower pace, the Energy Department said in its Annual Energy Outlook in March. U.S. consumption peaked in 2007 at 20.65 million barrels a day and will have recovered to 20.05 million barrels by 2020, according to the report.
U.S. product demand could decline quite significantly over the next 20 years, said Kohler.
Demand for refined products may be reduced by increased blending of ethanol with gasoline and government rules to boost fuel efficiency in cars. Ethanol accounted for about 7.2 percent of a gallon of U.S. gasoline this year and will reach 14 percent by 2020, under federal standards.
Automakers will be required to increase average mileage by 9.3 percent to 27.3 miles per gallon between 2010 and 2011, the U.S. Department of Transportation said in March. The administration of President Barack Obama plans to increase the mandate to 35.5 miles per gallon by 2016.
U.S. legislation aimed at reducing carbon emissions may lead to additional closures as companies are forced to pay for a permit for each ton of carbon dioxide they emit.
The bill passed in the House of Representatives would force the shutdown of about 2 million barrels of daily U.S. capacity, according to Roger Ihne of Deloitte Consulting LLP in Houston. Thats equivalent to 12 percent of the nations fuel-making capabilities.
Theres no question it will result in lost jobs, higher costs and a loss of refining capacity in this country, said Valero spokesman Day. It will make it too costly for marginal refiners to operate in the U.S. and compete with new refineries being built in Asia.
Lion Oil Co.s vice president, Steve Cousins, told a congressional subcommittee on June 9 that the company would have to spend $180 million a year on carbon permits compared with average annual profit of $13 million, forcing it to shut a plant in El Dorado, Arkansas, that processes l70,000 barrels day.
The last round of shutdowns followed the oil price shocks of the 1970s and an earlier set of rules to reduce emissions. The number of U.S. refineries dropped to 149 in 2000 from 319 in 1980, Ihne said in a July 9 report.
More refinery closures are likely now than in prior cycles since independent refiners would be less likely to carry an unprofitable refinery on their books, versus an integrated oil company with a stronger balance sheet, said Rousseau in a June 30 note to investors.
To contact the reporters on this story: Aaron Clark in New York at firstname.lastname@example.org; Barbara Powell in Dallas at Bpowell4@bloomberg.net
Last Updated: July 19, 2009 20:35 EDT
July 28, 2009 at 2:41 pm #6049
Here is Bloomberg’s report on Refining position. <Be sure to read “Gross Profit & Gross Margins” in their statements remember they are still reporters – the Net versions are much grimmer than the Gross Profit/Margins.> Because of lower complexity – most of the idled/shutdown Refinery capacity (IEA) projections are for China & Europe …..but is essentially true for most global low complexity refineries. And in bad markets lot of Independent / Non-Integrated Refineries have similar problems despite level of complexity because of exposure on non-Integrated crude supplies – (which is why Valero chimes in on lot of the comments).
But ~ backs up a lot of projections I have been making on bad government programs Ethanol/Carbon Tax impacts & ect around similar positions.
The stupidity of Ethanol is proof that government involvement in business is always a bad sign – moving from 7% to 10 & 20% esentially cancels out all progress Car companies could make improving gasoline milage up 35MPG because every 3% Ethanol essentially removes 1-3MPG, and all data coming in on Ethanol damage to carbruetor jets says you couldnt keep them tuned to stay at 35mpg.
Speaking of Government Programs – does anyone remember that the Department of Energy was formed 40 years ago to decrease US dependency on foreign oil & although it now has budget of $24Billion/year and over 24,000 folks – it hasn’t made a dent (in fact their record shows a push against all US developments in favor of bringing in foreign oil)!
July 29, 2009 at 12:58 am #6048
whats curious to me charlie, is the decrease in margins on sour crude
i thought most of the oil being pulled was sour crude, thus giving it a lower value and its complex needs in refining gave it an extra spread
has the currents switched back to med or light due to many refinerys being retrofitted to run sour?
also who are you concerned wont make it out of this recession?…. especially ones on the channel…..
August 13, 2009 at 4:21 pm #6036
well since i havent seen anyone keep the discussion going here is what i found today.
BUY OR SELL-Should heavy crude cost as much as light?
3:55 PM ET 08/12/2009
By Joshua Schneyer
NEW YORK, Aug 12 (Reuters) – Heavy, sour crude has rallied against light, sweet crude in recent months, bringing grades like Mexico’s Maya <O#MYA-> and U.S. Mars sour <MRS-> into close range with light-sweet crudes, such as West Texas Intermediate <CLc1>.
Maya’s discount to WTI is around $4.63 a barrel, well below 2008’s $11.60 a barrel and the five-year average of $13.15. (Click here for a graphic: http://graphics.thomsonreuters.com/089/CMD_SP0809.jpg ) Mars is trading at a rare premium to WTI.
Light/sweet crude normally fetches large premiums since it is easier to refine into prized light fuel. But high inventories of light crude and fuels, along with OPEC supply cuts, have helped boost heavy grades.
Higher heavy prices are bad news for refiners like Valero <VLO.N> that invested billions to process more sludgy crude. Many heavy crude producers, as well as traders who stockpile crude or arbitrage spreads, profit from the unusual spreads.
Are heavy/sour crudes about to strengthen even further?
Heavy crude may rally in coming months, and big discounts for heavy crude may never return, some experts say.
“OPEC has been cutting supply of mostly heavy/sour crude and that’s going to continue. A light crude glut in the U.S. will continue to pressure the price of near-term WTI. That will strengthen heavy,” a Houston-based cash crude broker said.
OPEC agreed to cut output by 4.2 million barrels since late 2008, restricting shipments of heavy/sour crude.
“Much of OPEC production is “heavy”, as well as high sulfur. Thus their unpredictable actions, expectation of actions, cheating, not cheating (or) changing outputs can bring a huge change in light-heavy price differentials very quickly,” said Carl Holland, head of Energy Trading Solutions.
A trader said refiner investments in coker units to process more sludgy crude may keep heavy crude differentials strong.
The high price of heavy products like fuel oil versus light products helps heavy crude, which renders more heavy fuel.
U.S. Gulf Coast residual fuel oil traded at 92 percent of the value of WTI on Tuesday, up from an average ratio of between 70 to 75 percent before this year, a trader said.
Some believe heavy crude’s heyday may soon end. Brad Samples, analyst at Summit Energy, said light oil demand should recover on economic recovery in OECD countries.
“I wouldn’t expect spreads favoring more heavy or sour crudes to widen more,” Samples said. “By the end of 2009 we’ll probably see demand begin recovering for the lighter crude.”
Historically low natural gas prices give power plants a cheap alternative to burning residual fuel, Samples said.
“I see (light/sweet) crude getting somewhat stronger than sour over next month or so. We could see tightness in sweet grades due to maintenance in the North Sea,” said another cash crude trader.
“I think sweet grades will remain in demand as refiners opt to minimize distillate fuel production and keep gasoline supplies at adequate levels.”
(Additional reporting Joe Silha; Editing by David Gregorio)
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