By Jocelyn Parker

11-07-04

With the United States consuming record amounts of gasoline, there's never been a more dire need to build new oil refineries. But don't hold your breath.

There hasn't been a major new refinery in the United States since 1976, and experts say none are on the horizon. Refineries are expensive, and nobody likes having a big, smelly refinery near their back yard.

But another reason you won't see any refineries springing up soon is that oil companies like things the way they are: Their refineries are operating near capacity, so they sell practically every drop of fuel they make.

Consumers' driving habits and vehicle choices don't make things better. Consumption has jumped 24 % since 1990, thanks in part to the surge in the number of sport-utility vehicles on the road. And the government expects another 48 % increase by 2025. There aren't enough domestic refineries to do the job. As a result, the amount of gas that's imported has gone from a mere 4 % of consumption in 1995to about 10 % today.

Insufficient inventories of domestically refined gasoline contribute to high prices and spark fears about gas shortages, as they did last June. Refining makes up roughly 14 % of the cost of a gallon of gasoline, and in recent weeks gas prices reached record highs. Because demand for gasoline is greater than what the refineries can produce in many cases, refineries can charge more for gasoline.

The soaring gas costs are bringing more attention to the limited refining capacity in the United States. The number of domestic refineries is declining. In 1980, there were more than 300 US refineries. At the end of 2003, there were 149. Through early June, those refineries cranked out 8.5 mm bpd of gasoline, up 4 % from last year. Some are running at close to full capacity just to keep pace with demand, so it's tough to further boost production.

The chance of new ones being built is slim. Stringent pollution controls and the overall public distaste for refineries make it nearly impossible for oil companies to build more, oil experts say.

"No one wants one," said Anthony Sabino, associate business professor at St John's University in New York. "Building a refinery is very expensive. It's a multibillion-dollar proposition."

Even a smaller-scale refinery could cost at least $ 1 bn to build, said James Nelson, a division manager at Marathon Ashland Petroleum's Detroit refinery, the only refinery left in Michigan. And because of changing clean-air rules for refineries, it costs millions to maintain the operations, experts say.

In the past 10 years, US refiners have invested about $ 47 bn in environmental improvements for their facilities, much of that to make cleaner fuels. Recently, refiners have invested millions to make cleaner, low-sulphur fuels for the environment. But even before the idea of building a new refinery leaves the gate, it's faced with opposition from consumers and environmentalists. They're considered eyesores, so no one wants one in the neighbourhood.

It's difficult for oil companies to get the environmental permits to build. Smaller refineries have a tough time thriving because they just don't produce enough fuel to offset their operating costs, and experts say that's why so many refineries have shut down over the years.

"Most of them, if not all, were inefficient, and the owners of those refineries were unable to make a reasonable profit," Marathon's Nelson said. "That's typically the reason people would shut down a refinery."

Ashland, which has a 32 % interest in Marathon Ashland Petroleum, closed several refineries in the past 25 years. Marathon Ashland operates seven refineries. Marathon's Garyville, Louisiana, refinery, which makes 245,000 bpd of gasoline, was the last major refinery to be built in the United States. Since then, oil companies have acquired or expanded refineries to boost production.

For instance, production at Garyville went from 232,000 to 245,000 barrels this year, Nelson said. And its Detroit refinery is going from 74,000 barrels of gas to 100,000 barrels by 2005. A barrel is 42 gallons. Experts also say fewer refineries give the oil companies a huge advantage: They stand to make a lot more money when supplies are limited, so, even if people wanted more refineries, companies don't have a lot of incentive to build more.

Though opposition to refineries is abundant, some lawmakers are pushing for construction of new refineries to help ease tight gasoline supplies and lower prices.

The House of Republicans recently pushed through legislation that could speed up the regulatory and approval processes for new refineries in certain regions of the country. The bill encourages construction of new refineries in areas that have an unemployment rate 20 % higher than the national average, have experienced massive layoffs in manufacturing or have a closed refinery in the area. The bill still has to be approved by the Senate.

Source: Knight Ridder Newspapers