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Wednesday, November 30, 2005

U.S. Refinery Bottleneck Could Ease ... (an Emphasis on the Could)

Over the past two months, energy companies have announced U.S. refinery expansions of almost 1 million barrels of oil per day - nearly 6 percent of the amount of gasoline produced today, according to the Christian Science Monitor (CSM). More announcements may come this spring.

If the oil companies follow through on their plans, the planned expansions would add capacity equal to half of all the expansions over the past ten years. The new capacity could help to relieve the persistent tight supplies and price run-ups at the pump, as happened this fall in the wake of damage to Gulf-coast refineries after hurricanes Katrina and Rita.

The companies who have announced expansions include Valero, who plan to add an additional 400,000 barrels per day, as well as Chevron and ExxonMobil, each planning to add 75,000 barrels per day. Suncor, Motiva, and Citgo also have expansion plans. The planned capacity is expected to come online within the next three to five years.

One example is the Marathon Oil refinery in Garyville, about an hour north of New Orleans. The refinery sustained little damage from Katrina. The Marathon Oil refinery is the youngest plant in the US at 29 years old which illustrates the age of the United States' refinery infrastructure and the lack of major expansions. According to CSM, late last month, Marathon said it would spend $2.2 billion to add 180,000 barrels per day - equal to 6 million gallons of gasoline, diesel, and kerosene - to its refining capacity of 245,000 barrels per day.

"When you look at our nation's current refinery capacity and see how hard the refineries are run and then add the outlook for increased petroleum demand, you see that there is clearly a need for additional refining capacity," says Gary Heminger, president of Marathon Petroleum Co. LLC, in an e-mail to CSM.

This large addition at Marathon is nearly the equivalent of an entire new refinery. According to CSM, companies generally prefer expansions - that is, adding more refining facilities - instead of building new ones on different sites because it's faster and will probably not require new zoning. Permitting issues must still be resolved and Robert Slaughter, president of the National Petrochemical & Refiners Association in Washington, cautions that while "It looks like refining investment is on the uptick, ... there are two cautions: All these additions must be permitted, and people can change their minds."

The plans for expansions come as Congress is debating legislation that some hope would encourage new refining capacity by changing environmental regulations and streamlining the permit process. The House has already passed one version that includes a provision to pay oil companies for delays caused by federal, state, or local authorities or for unforeseen litigation. A Senate bill failed to get out of committee by one vote, but it may get attached to another bill, says a staffer.

This summer's devastating hurrican season seems to have served as a wake-up call to many who now realize that the fuel problems we face in the United States are less a problem of supply (that will come soon, just wait) and more a problem of a refinery and distribution bottleneck. Refinery capacity in the U.S. has been far below demand for sometime and we currently import millions of gallons of refined oil products like gasoline and diesel from Canada and Mexico and even as far aways as Saudi Arabia. We consume over 20 million barrels of oil per day yet have capacity to refine 16.9 million barrels per day (see graphic above).

The high gas prices we saw this summer and fall and high heating fuel costs we are likely to see this summer are the result of an already overworked U.S. refinery system whose back was broken by damage from Katrina and Rita. Damaged refineries are coming back online and gas prices are returning to pre-hurrican season levels but this does not mean we are in the clear. Our refinery capacity is still far below our demand and as our demand continues to rise and our supply of imported refined products dwindles due to increased demand in the countries we import from (Canada and Mexico's demand for refined products is on the rise as well and you can bet they'll take first dibs on their refinery output when the time comes) we are likely to face an ongoing refinery bottleneck and ensuing high prices for refined products.

I am not a proponent of the measures being explored by Congress to incent refinery construction - easing environmental restrictions and then allowing oil companies to sue for lost time when we do try to enforce what little regulations remain seems like a terrible idea to me - and it seems that perhaps the measures are not needed as oil companies are planning on making additions already. Still, we
do need more refinery capacity and perhaps other incentives should be explored.

The real problem is that oil companies have little incentive on their own to build new capacity as they can continue to run their existing refineries at the same costs but sell the resulting product for much higher prices due to supply constraints. This bottleneck also ensures their crude supplies don't become depleted as rapidly and they can hold off on new capital investments in both refineries and new oil exploration. Building new plants only means outlaying more capital in order to compete with their existing production capacity and drive down their profits/gallon of refined product.

All in all, it seems like we are in a real pickle. All the more reason to turn to fuel efficiency and alternative transport energy sources/fuels.

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