Ambitious growth plans by refiners come with uncertainty

New York (Platts)--29Dec2005

The US refining industry went out of its way in 2005 to publicize plans
to boost product output, but how many of those projects will actually see the
light of day?

     Market watchers claim several factors will influence plans going forward,
such as the soaring price of labor now focused on hurricane-related repairs
and competition for materials as other countries plan greenfield projects. Of
course, refining margins will also continue to play a key role.

     "Some of them may not pan out," said Alfred Luaces, senior principal
consultant with Purvin & Gertz.  He told Platts while industry has the money,
and related political pressure from windfall profits this year, there is a
"race" on for competing projects.

     US expansions and greenfield projects are targeting start-up between
2006-2012.

     "A lot of projects are under evaluation...what exactly you're going to do
three to four years from now" is not certain, said Rich Marcogliese, Valero
Energy's senior vice president of refining operations.

     A "big chunk" of Valero's plans are "under review," he said, citing the
refiner's $5-bil plan to boost crude capacity by more than 400,000 b/d by
2010. Valero earlier this month announced it had decided not to move forward
on an upgrade that would "sour up" its Lima, Ohio, plant, saying it was too
expensive.

     Cost is an issue, especially labor. Hurricanes Katrina and Rita battered
refineries along the Gulf Coast in August and September. In early December,
more than 800,000 b/d of refining capacity remained offline. That included
BP's 437,000 b/d Texas City, Texas, plant, along with ConocoPhillips' 247,000
b/d Belle Chasse refinery and Murphy Oil's 125,000 b/d Meraux plant, both in
Louisiana.

     There was a "big [labor] draw post-hurricane," said Marcogliese. "We
already know that labor is being bid up and we have had to increase hourly
payments...," as well as paying expenses. "Some other companies will try to
bid away" good workers, he added.

     The workforce is also involved in upgrades ahead of new federal Tier 2
gasoline and ultra low sulfur diesel regulations in 2006, he noted. On top of
that, there is global demand for pressure vessels and compressors. There has
been an "escalation" on cost and "competition for fabrication shop space," he
said.

     "There's a finite population of skilled folks who work on refineries,"
agreed Charlie Drevna, director of policy and planning at the National
Petrochemical and Refiners Association. "No question things will be delayed,"
he said, adding, though, it will be "by months" rather than years.

     "Until they're up and running there's always a concern...but I'm very
confident that (the announced projects) are damn near as committed as they're
going to be," said Drevna, noting the companies made formal announcements
while under scrutiny by Washington. "These are real and actively being
pursued."

GUESSING ON THE ECONOMICS 

     ConocoPhillips, whose CEO was called to testify before a Senate panel
looking at windfall profits, recently trumpeted a $4.3-bil plan to boost
overall capacity by 11% to 2.41-mil b/d between 2006-2011. The company noted
its plans for 230,000 b/d of additional capacity equates to a new refinery.

     The "real crapshoot," said Drevna, is whether the big discount for sour
crude versus sweet crude that has led to plans for coker expansions or
additions, will be maintained.  "If everyone chases the same dog," that could
tighten the spread between sour and sweet crude, he said, adding "no project
is a certainty as far as return."

     "Everybody's looking at the same economics," said Marcogliese. Deep
discounts for heavy crudes like Mexican Maya, now $17-18 below WTI, are
currently coupled with strong distillate cracks. The coking process turns
heavy crudes into distillate-quality fuels.

     There is still more evaluation that needs to be made, like "how much
heavy crude is really out there," Marcogliese said. 

     While 2006 will see some new light sweet crude capacity coming on stream,
the bulk of new production capacity being developed will be sour and heavy,
according to OPEC's acting secretary-general Adnan Shihab-Eldin.

     Valero, a big proponent of the heavy crude margin, is mulling a 10,000
b/d expansion of its Texas City coker to 65,000 b/d through debottlenecking.
The company is also considering new cokers at St Charles, Louisiana, and Port
Arthur, Texas. Debottlenecking "is the most attractive step," said
Marcogliese.

     US refiners are also making plans to use cokers to process increasing
amounts of Canadian synthetic crudes. ConocoPhillips' plans center on upgrades
at its Wood River, Illinois, plant to run oil from its Surmont oil sands play
in Alberta.

     While many plans involve cokers, Sunoco's use of sweet crudes warrants a
different tack. The company's FCC project at its 330,000 b/d Philadelphia
plant "is [like a] a coker project," but without the coke, said Joel Maness,
senior vice president refining and supply at Sunoco. He said the FCC will turn
25,000 b/d of resid into clean products without creating petroleum coke that
is a "give away" in the market.

     "We certainly don't consider it a race (for project completion)...we see
some opportunities in our system," he said.  The big Northeast refiner has
announced a $1.8-bil plan to boost crude capacity by 100,000 b/d. Maness, like
most refiners, agrees the US projects will not halt the flow of gasoline
imports into the US, currently around 1-mil b/d.

     If all the planned projects come on line it will "negate the need to
increase imports," but the US will remain dependent on products imports, said
NPRA's Drevna, adding "the closer we can get to serving domestic demand with
domestic supply, we'll all be better off."

		--Beth Evans, beth_evans@platts.com

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