July 28, 2010 / 5:50 PM / 9 years ago

Analysis: U.S. refineries still need to trim capacity

NEW YORK (Reuters) - Atlantic Basin refineries remain most at risk for closure as refiners cut more capacity to balance supply with still-weak demand for gasoline and other oil products, but refineries in other parts of the United States are not immune.

The global economy is expected to show signs of recovery in 2010 and oil demand is predicted to grow but key gasoline demand in the world’s largest oil consumer is not expected to return to its 2007 peak.

“Refineries at risk are not just in the Atlantic Basin,” said Mark Routt, senior staff consultant with the economics unit of Texas-based consultants, KBC Advanced Technologies.

“Small refiners will find it increasingly difficult to compete against economies of scale available to larger rivals. So, too places in Canada and even the U.S. Pacific Coast where there are several refineries are also under pressure.”

STRUCTURAL DEMAND SHIFT

Northeastern refineries are most at risk because they face strong competition from European imports and lower-cost Gulf Coast plants for part of a shrinking gasoline pie.

“The East Coast is two different markets,” said Michael Hileman, Vice President of Texas-based consultants, Solomon Associates.

“European refiners dump their gasoline on the East Coast. With the Colonial Pipeline, they are linked to the Gulf Coast refineries which are large and efficient.”

A recent study by Washington-based energy consultants PFC Energy found risk of closure for 58 out of the 230 refineries feeding the Atlantic Basin, comprised of East Coast and European refineries, markets where demand has been declining for several years.

Sunoco Inc, Petroplus and Total closed refineries in 2009 totaling 1.1 million bpd of capacity in the Atlantic Basin due to poor profit margins.

“PFC Energy’s view is that the market environment is currently in the midst of a structural shift in demand that goes beyond the impacts of the economic downturn,” said Nathan Schaffer, Director of Downstream and Petrochemical Group.

The growing mandate for using renewable fuels is shifting any demand increase for gasoline to ethanol and other alternative fuels, adding to the pressure on lagging Northeast refiner margins.

According to Credit Suisse, which closely tracks U.S. and global refinery profit margins, the four other U.S. regions are beating margin forecasts, with only the Northeast profits lagging at $7.63 a barrel versus expectations of $8.50.

SURVIVAL OF THE FITTEST

U.S. products demand has dropped about 2 million barrels per day from 2007 levels of 18.46 million bpd, eroded by the economic crisis.

East Coast gasoline demand was 13.5 percent below that level by March this year, and West Coast demand had fallen further, down 16.3 percent. Refiners in both regions adjusted their refinery runs down, mostly lagging the national average.

KBC’s Routt thinks California is well-positioned and will likely avoid closures but that refineries in Washington state, Alaska and Hawaii face pressure to rationalize.

Routt sees the Rockies region is relatively balanced but says that some smaller Gulf Coast refineries could at risk.

“The smaller players there are not going to get the economy of scale, particularly when Port Arthur comes on,” said Routt,

Motiva Enterprises LLC is expanding its joint venture Port Arthur, Texas refinery from 285,000 bpd to 600,000 bpd by 2012. Marathon Corp. recently completed a 180,000 bpd expansion of its 436,000 bpd Garyville, Louisiana refinery.

The Midwest is seen to be relatively immune for closures. The region cut almost half a million barrels of capacity beginning with 1990’s economic downturn by closing. A total of 1.2 million bpd of refinery capacity was permanently closed between 1990 and 2008.

With few exceptions, the region’s refinery run rates have exceeded the national average by several percentage points, eased along by access to Canadian oil flowing from Alberta’s oil sands.

As a result, some Midwestern refiners, like Marathon have been able to align supply from refineries with demand from gas stations.

“A large company with many refineries looks at the entire network. They look at the entire supply orbit cost,” said Solomon’s Hileman, citing Shell’s recent shutdown of their Montreal refinery as an example where the company decided it would be easier to meet supply obligations from other refineries.

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