30-04-07

Oil refining's perception problem has taken a new, unflattering turn: Not only are there not enough refineries, they don't run right.
After several years of calls for more production capacity in one of the world's most technically sophisticated industries, attention has shifted to what appears to be an unusual number of breakdowns and extended downtime, raising concerns about the adequacy of oil-product supplies.

Just about every day in recent weeks -- normally a period when refineries ramp up production -- unit malfunctions, fires and other mishaps have oil traders and market watchers riveted. Oil futures and wholesale prices have staged breathtaking rallies that traders say are due to the prospect of lost supply and falling inventories.
New York Mercantile Exchange gasoline-related futures for May delivery rose 6.47 cents to $ 2.3550 a gallon, the highest level for a front-month contract since last August. Over the week, the May contract gained 22.39 cents a gallon, or 10.5%.

Retailgasoline prices have vaulted to $ 3 a gallon in many locations. Analysts are using the word "scary" to describe the country's fuel supply situation.
"The problem is we have an antiquated refining system that continues to fall apart and is having significant problems coping" at utilization rates normally seen at this time of year, said Nauman Barakat, senior vice president at Macquarie Futures USA in New York.

The operational problems have affected refineries of all sizes, all types of processing units, in all regions -- and were caused by all kinds of events, including fires, severe storms, crane accidents, human error and rodents' unfortunate contact with electrical substations.
Some recent examples include BP's giant refinery in Whiting, Indiana, where a fire one week and a power outage the next shut crude and gasoline processing units; Valero Energy's plant in Norco, Louisiana, where mechanical failure shut a gasoline-producing unit; and Marathon Oil's refinery in Garyville, Louisiana, where a fire shut a gasoline production unit.

The oil market, still reeling from the mid-February fire at Valero's McKee refinery in Texas and the resulting price fallout, reacted to the incidents with massive buying. Industry observers and participants, while acknowledging the large number of incidents, aren't so quick to attribute the operational problems to aging infrastructure. They point to changes in refineries and fuel composition, how companies carry out scheduled maintenance and labour issues.
"I think you're looking at random events that aren't common but they're clustered," said John Jenkins, director of refining, chemical and petrochemical consulting for Jacobs. Jacobs is a division of Jacobs Engineering Group.

Seasonal maintenance programs, called turnarounds, are better planned than they used to be but may be taking longer due to workforce issues involving contractors.
"There are problems getting workers, problems with their level of experience and productivity," Jenkins said. In addition,ramping up high-temperature, high-pressure units after shutting them down to perform repairs, is a process fraught with glitches.
"As they come up, units can leak and malfunction until they get hot," he said.

"Until you're up and running comfortably, the probability of having a problem is higher," Rich Marcogliese, Valero's head of refining, said the addition of units, called hydrotreaters, needed to make mandated lower-sulphur gasoline and diesel has made all units in refineries more inter-related. As a result, outages of those units can restrict the amount of petroleum feedstock processed throughout the refinery.
"Refinery operations have been more complicated and therefore, (feedstock) throughput is restricted when you have outages more so than we've seen historically," Marcogliese told.

Some don't have a ready explanation for the rash of refinery problems and see them as ultimately surmountable but they acknowledge the outages' effect on perceptions.
"Anecdotally, it's everywhere and it's a lot," said Mark Routt, an analyst with Energy Security Analysis in Wakefield, Massachusetts.
"They should be fixable," he said, referring to the breakdowns. "However, because they're so widespread and going on and on, they're having a cumulative effect."



Source: Dow Jones & Company