U.S. refiners turn attention to diesel amid boom

Analysis

NEW YORK (Reuters) - After focusing heavily on gasoline for decades, U.S. oil refiners are starting to redirect their attention to hiking diesel production capacity to cash in on a global boom in demand for the fuel.

The work may be slow to come online, however, as U.S. refiners finish up a slew of current crude processing capacity projects they've already committed to and gauge competition from robust refinery expansion plans overseas.

"The trend that is important behind the story of the future expansions is the downtrend in gasoline," said Joanne Shore, analyst for the U.S. Energy Information Administration. "Any investment decisions, I would assume, would be focused on how we are going to boost the distillate yield, relative to the gasoline," she said.

American refinery infrastructure has been heavily biased in favor of gasoline production for decades, but the motor fuel has lost some of its luster as high costs at the pumps and the rise of biofuels cut into U.S. demand growth.

U.S. legislation mandating an increase in ethanol production and requiring greater fuel efficiency is expected to reduce the demand for gasoline from U.S. refineries by 7 percent by 2022, according to EIA calculations.

Meanwhile, tight power supply and rising energy demand in countries like China, South Africa, Chile, Argentina and parts of the Middle East have touched off a global boom in demand for distillates for use in electricity generators, adding to robust demand for the fuel from the European auto fleet.

Valero Energy Corp (VLO.N), a leading U.S. refiner based in San Antonio, Texas, has already focused several expansion projects -- in Port Arthur, Texas, and St. Charles, Louisiana -- on increasing distillate output instead of gasoline.

"We feel that demand for distillates is going to be higher than gasoline for the next several years. And margins right now for distillates are quite a bit higher than gasoline, so it makes more sense to do your investments there than other projects," Valero spokesman Bill Day said.