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BP, Irving scuttle plans Sweeping changes in refining sector rule out need for New Brunswick plant; North America awash with surplus capacity Gary Park For Petroleum News
Given a bulging list of North American refineries up for sale, it was no surprise that BP and Irving Oil bailed out on plans to proceed with North America’s first greenfield oil refinery in more than a quarter-century.
The privately held New Brunswick energy giant and the global supermajor took the decision after conducting a joint feasibility study of their plans for a 300,000-barrel-per-day facility at Saint John, New Brunswick — doubling capacity of Irving’s current refinery at the site.
Construction was supposed to start no later than 2012, sourcing crude feedstock from Canada’s East Coast offshore, the North Sea, West Africa and South America, but the study period coincided with what the partners described as “declining global economic and industry conditions.”
The negatives include the recession, a souring market as rising crude costs eat into refinery profits, motorists cutting back on their driving, an aging population and improvements in auto efficiency.
Kevin Scott, Irving’s director of refining, said the challenges have now reached the point where “we’ve actually seen demand for our product fall off for the first time in many years.”
“We’re looking at forecasts from 2015 to 2040 and we continue to see gasoline coming under pressure,” he said.
Although Irving will complete the environmental permitting process for the Eider Rock project, the chances of putting the project back on track are “quite slim … unless something changes dramatically,” Scott said.
Facilities on the block Currently, there are reports that Sinclair Oil plans to sell its 80,000-bpd Tulsa, Okla., refinery; bankrupt Flying J has its 60,000-bpd plant at Bakersfield, Calif., on the block; Valero Energy has had its 285,000-bpd refinery at Aruba in the Caribbean on offer since late 2007; Harvest Energy Trust has deferred a C$2 billion expansion of its Newfoundland plant; and Shell has put its 130,000-bpd Montreal refinery under strategic review, with options that include outright closure, a year after it abandoned plans to build a refinery in Ontario to handle oil sands production.
The United States has about 1 million bpd of idle refining capacity and gasoline in storage tanks has reached a 24-year high.
Michael Ervin, an independent Canadian petroleum analyst, said he expects and has been suggesting for some time “that we’ve likely seen a peak in North American demand.”
“We’re going to see a lot of initiatives and technology that will result in a long-term decline in demand for motor fuels.
“Given that there is ample spare refining capacity in North America, I think Irving and BP made the right decision,” Ervin said.
Despite the fact that refineries have added to corporate profitability over the past 10 to 15 years, he believes North America is returning to a prior time when refining was “never a particularly profitable business.”
Aside from the fact that the estimated cost of Eider Rock has climbed in 18 months to US$8 billion from US$7 billion, Scott said Shell’s decision indicates “some of the challenges refineries face.”
“With long-term demand declining, the less viable refineries could be vulnerable to the downturn,” he said.
Other discussions reported BP, meanwhile, is also reportedly in discussions with PetroChina and Sinopec, two of China’s state-owned companies, about building a large refinery to meet rising demand in China, adding to a stream of new refineries in India, Africa and the Middle East that will ship gasoline and diesel fuel to North America, further undercutting the profitability of domestic refiners.
A new study by Purvin & Gertz said falling demand for refined products and the emerging surplus of refining capacity is threatening profitability worldwide.
It said product demand growth may resume in 2010, but the economics will only improve once refining capacity is rationalized.
“We expect that no less than 1 million bpd of refining capacity needs to be shut down in the Atlantic Basin to allow a return to profitable operating rates,” the study said.
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