World's Energy

April 13, 2009 - Dow Jones Newswires by Suan Daker - HOUSTON, The laws of supply and demand signal some U.S. oil refineries may be forced to shut down soon. Analysts are beginning to ponder how many could close - and which will be first to fall. Most believe U.S. gasoline demand peaked in 2007, but many expansion projects at U.S. refineries are still underway. This may leave the country with more refining capacity than it needs. "The sentiment (among refiners) is how to start to think about how to close, who is going to close," said Alan Gelder, the head of Americas refining research for Wood Mackenzie, an Edinburgh-based consultancy. Chris Barber, an oil market analyst for Energy Security Analysis Inc. in Wakefield, Mass., said he's recently taken up the task of figuring out which facilities will be shuttered. "We haven't nailed down any specific refineries yet," Barber said. Analysts scrutinize several factors to determine a refinery's health. Can a plant run on high-sulfur, cheaper crude and can it meet new environmental regulations without a costly upgrade? Size and location are very important, too. Many are looking at small refineries, which are typically less complex. However, just because a refinery is petite doesn't necessarily make it a more likely candidate for closure, Barber said. A few tiny plants have very niche markets, either for geographical reasons or because they process a specific crude no one else can run, he said. Currently, U.S. refiners are running at low utilization rates due to low profitability levels. So any closures aren't expected to have an immediate impact on gasoline and diesel prices, as idled units could be ramped back up relatively quickly. However, if fuel demand rises over the next several years, prices may follow. Refiners were caught short-handed earlier in this decade, as demand surged following a wave of refinery closures in the 1980s and 1990s. There are now half as many refineries - less than 150 - than there were in 1980. The gasoline and diesel price spike that accompanied the surge in demand raised the ire of politicians and their constituents. The sensitivity of the issue had made talk of refinery closures taboo, although it's recently become less so due to lower fuel prices and refiners' well-publicized financial woes. Two plants potentially stand out as ripe for permanent closure, according to some analysts. Sunoco Inc. (SUN) has said it will turn its Tulsa, Okla., refinery into an oil products terminal if it can't sell the plant this year. The company wants to get rid of the refinery because new environmental regulations require upgrades that are too expensive. Also, given the tightness of credit markets, a buyer is unlikely to surface. Flying J.'s refinery in Bakersfield, Calif., was idled last year shortly after the truck-stop and refining company filed for bankruptcy.
Taking Refineries' Pulse: If another wave of refinery closures comes, analysts say East Coast plants are especially at risk. They are mainly geared toward gasoline production - which analysts see waning - instead of diesel, and they're vulnerable to European imports, according to a study released by Wood Mackenzie last month. Most analysts refuse to speculate on what plants may go down first. But Neil Earnest, an industry consultant and vice president of Muse Stancil in Dallas, Texas, picked out three East Coast refineries he claims could close in a worst-case scenario: Sunoco's Eagle Point refinery in Westville, N.J.; ConocoPhillips's (COP) in Trainer, Pa.; and Western Refining Inc.'s (WNR) in Yorktown, Va. All three companies said they have no plans to mothball the plants Earnest named. Western, saddled with debt, could find itself in a bind if the economy doesn't improve. The plant was put up for sale in 2008 to reduce its debt, but Western is now considering keeping it, said Western spokesman Gary Hanson. The plant is becoming "more and more valuable" due to recent capital improvements. It would make sense for Sunoco to shut one of its three Pennsylvania and New Jersey plants because it would improve margins for the other two, Earnest said. In January of this year, Sunoco was utilizing about 76% of its refining capacity, according to its fourth-quarter earnings report. Utilization rates around the country have been low but the country's average was 82% in January, according to the Energy Information Agency. The Wood Mackenzie study specifically pin-points refineries located in Philadelphia, New Jersey and Maryland as having trouble competing on the East Coast. Earnest said ConocoPhillips could close its Trainer, Pa., plant on the Delaware River, because it runs expensive, low-sulfur and low-viscosity crude. But major oil companies' refineries are generally the most efficient - and therefore, the least likely to close, said George Pilko, of Pilko & Associates, a Houston consulting firm that does mergers and acquisition deals. "ConocoPhillips regularly reviews the performance of all of its assets, including refineries," ConocoPhillips spokesman Bill Stephens said in a statement. "We currently have no plans to idle any of the refineries we operate, which includes 12 refineries in the U.S., plus others overseas."
No Small Matter: Closing a refinery also comes with its own set of hurdles. Environmental remediation could be in the tens of millions of dollars, said Larry Nettles, an environmental lawyer and partner at law firm Vinson & Elkins in Houston. "If it's an older refinery it may well sit on top of a large pool of contamination," Nettles said. Those refineries with the fewest environmental liabilities will be easier to close, he said. But perhaps a company's biggest fear in closing a plant is that it will help the competition. "The refiner's nightmare is you close (and) the rest of the industry benefits. Margins are great. And you're the one who has paid the money to help everyone else. They don't tend to be that altruistic," Wood Mackenzie's Gelder said.