Houston (Platts)--17May2013/551 pm EDT/2151 GMT

US refiners aim to maximize distillate output to work attractive export arbitrage opportunities, but may leave high-priced hydrocracker investments to competitor Valero Energy, who wants to be the first North American refiner to produce as much distillate as gasoline.

Valero plans to implement a one-to-one gasoline-to-distillates ratio by around 2015, after more than $3 billion worth of projects go live to increase the company's distillate production, the company said.

Hydrocracker projects are under way at the company's 180,000 b/d Meraux, Louisiana, 290,000 b/d Port Arthur, Texas, and 270,000 b/d St. Charles, Louisiana, refineries. Hydrocrackers allow for the reprocessing of various feedstocks into higher value products and give a relatively large yield of low sulfur distillates like jet fuel and diesel.

Historically, US refiners have had a two-to-one output ratio for gasoline and diesel, respectively, according to the Energy Information Administration. For the reporting week ended May 10, US finished motor gasoline production was 8.929 b/d while US distillate fuel oil production was 4.640 million b/d, the EIA said.

"We are changing our portfolio to make more diesel," Valero Chairman and CEO Bill Klesse said this week during the Citi 2013 Global Energy and Utilities Conference. "In another two years, Valero will be a big exception for a North American refiner, in that our whole system will be about one-to-one of gasoline to diesel ratio."

Valero plans to shift its product slate, with refining system distillate yields estimated to grow to 39% this year from 33% in 2010 of total production volumes. At the same time, gasoline yields will decline to 42% in 2013 from 49% in 2010.

"We see diesel [demand in the US] increasing, but increasing slowly," Klesse said, who added that gasoline demand will continue to be relatively flat.

In recent years, US distillate output has grown due to refiners' capturing better margins than gasoline.

A refiner who runs light sweet and comparatively cheap Bakken Shale crude in a US Gulf Coast refinery, can capture an ultra low sulfur diesel refining margin of $14.23/b, according a Platts estimates. Using the same grade, the gasoline margin has averaged $10.90/b so far in the second quarter. To derive the margin, a $13/b transportation cost to rail the North Dakota crude to the Gulf Coast was used based on Valero data.

SOME REFINERS REMAIN 'GUN-SHY'

Already, US "refiners have shifted their product slate to maximize distillate over gasoline," Muse Stancil President Neil Earnest said.

Refiners "have already done all of the easy things" including tweaking crude unit temperature parameters to produce more distillate, Baker and O'Brien consultant Rick Thomas said. "Most of the remaining work would be the type of investments Valero has made in the hydrocrackers."

At the moment, some other refiners won't invest in large, expensive units, analysts said. Refiners, especially those along the Gulf Coast, in recent years spent large amounts of capital to make upgrades necessary to run heavy crude. Unexpectedly, the emergence of prolific light sweet shale oil production in the US has left the same refiners scrambling for ways to run these cost-advantaged grades.

Multiple analysts called the refiners "gun-shy."

"I don't think you will see anyone [aside from Valero] announce hydrocrackers in the near term," Cowen Securities analyst Sam Margolin said. "Most guys are ready to return cash to shareholders. They aren't ready to announce [capital expenditures]."

Nevertheless, refiner Phillips 66 distillates production is also moving closer to 50% of its total refinery output, spokesman Rich Johnson said in an email.

"We currently have a system-wide distillate yield of approximately 41%," Johnson said. "Our business strategy includes plans to increase yields of clean products and diesel. We identified projects at 11 refineries to increase clean product and diesel yield going forward."

For the first quarter of 2013, refiner Marathon Petroleum's total product output was 52% gasoline, 31% distillate, with the remainder other refined products, spokesman Jamal Kheiry said in an email. Marathon is investing to increase its distillate output at its 490,000 b/d Garyville, Louisiana and 206,000 b/d Robinson, Illinois, refinery, to increase distillate output, he said.

Valero plans to expand its hydrocracker at its Meraux refinery to 58,000 b/d from 38,000 b/d in 2014. The refiner will also expand by 75,000 b/d its new 57,000 b/d Port Arthur hydrocracker and its soon-to-be-completed 60,000 b/d St. Charles hydrocracker by 75,000 b/d as well. The Port Arthur hydrocracker began service late last year, with the St. Charles hydrocracker expected to be in service at the end of June. The expansions of the new Port Arthur and St. Charles hydrocrackers by 75,000 b/d will be completed in the first half of 2015.

During the first quarter, Valero exported 140,000 b/d of diesel, mostly to Latin America. Some also went to Europe, Day said.

Valero previously said that it would boost its export capacity for gasoline and diesel. The company can export 280,000 b/d of distillates, but this should rise to 425,000 b/d by the end of 2013 or early 2014.

"Part of the future of US refining is exporting," Klesse said. Future distillate export markets include Asia, especially China, South America, the Middle East and Africa, he said. Global diesel demand is about 27 million b/d and growing, he said.

Total US distillate exports in February were 828,000 b/d, according to the EIA, with 688,000 b/d heading to Latin America. The remaining 140,000 b/d went primarily to Europe, down from 453,000 b/d in October, 2012.

--Bridget Hunsucker, bridget.hunsucker@platts.com --Jeff Mower, jeff.mower@platts.com --Edited by Katharine Fraser, katharine.fraser@platts.com

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