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Refining Squeeze
Even amid shortages and high prices, refiners aren’t looking to expand
Allen Baker for Petroleum News
Crack spreads are booming and refiners are showing huge profits. But the cash flow isn’t being directed to new investments in the industry, and it likely won’t be for some time, if ever.
In the United States, refinery capacity is down by 900,000 barrels a day, according to the Energy Information Administration, compared with the total at the end of 2019.
Refineries are expected to run at 94% of capacity in the third quarter, the EIA says. That’s not a sustainable number for the long term, given maintenance and other downtime. Plus one big hurricane could sweep through the Gulf Coast infrastructure and reduce that in a hurry.
Despite looming shortages of retail fuel - and amid robust prices - refiners are planning to shut even more capacity, not add it. The big LyondellBasell Industries plant in Houston is scheduled to shut down at the end of next year, and it could cease operations earlier if there’s a major breakdown, the company says. That shutdown will cut U.S. refining capacity by an additional 268,000 barrels a day. High crack spreads aren’t changing the company’s plans.
Buybacks, debt cutting For major refiner Valero Energy Corp., big profits are being used to cut debt. The company just bought up $300 million in 4.0% bonds due in 2040. That’s a pretty attractive rate for long-term borrowing, but Valero doesn’t figure it needs that money for new investments.
That’s only a small slice, as Valero says it has reduced the company’s debt load by roughly $2.3 billion through transactions in the last two quarters of 2021 and the first quarter of this year.
On top of that, the company said it returned $545 million to stockholders in the first quarter through dividends and stock buybacks, as profit totaled $905 million.
All this is part of a trend in the oil industry, and to some extent in the entire constellation of companies in the U.S. They are recycling profits back to shareholders instead of investing it in new plants and equipment.
“We increased our annual buyback range to $5 to $10 billion,” said Chevron Corp. CEO Mike Wirth at Bernstein’s Strategic Decisions Conference on June 1. “We are buying back at the top of that range right now at a $10 billion annual rate.” That’s on top of a dividend yielding around 3% that Wirth says is a top priority for his company.
While Wirth says the company is growing its production through capital investments, the investment total has dropped sharply.
“If you go back a decade, we were spending $40 billion a year,” Wirth says. “This year, our capital budget is $15 billion …” That’s for an industry giant focused mainly on the upstream, of course.
Bucking government, or not? Still, Wirth had some things to say about refining, and its future:
“There hasn’t been a refinery built in this country since the 1970s. I don’t believe there will be a new petroleum refinery ever built in this country again.
“Capacity is added by debottlenecking existing units, by investing in existing refineries. What we’ve seen over the last two years are shutdowns,” he said. “We’ve seen refineries closed. We’ve seen units come down. We’ve seen refineries being repurposed to become biorefineries.
“We live in a world where the stated policy of the U.S. government is to reduce demand for the products that refiners produce - whether you look at the CAFE standards for fuel efficiency in vehicles, the Renewable Fuel Standard or the California Low Carbon Fuel Standard to substitute biofuels, EV tax subsidies, or internal combustion engine phase out policies.
“We’re a California based company. We deal with a lot of this stuff in California. At every level of the system, the policy of our government is to reduce demand. It’s very hard in a business where investments have a pay-out period of a decade or more and the stated policy of the government for a long time has been to reduce demand for your products.
“How do you go to your board, how do you go to your shareholders and say, we’re going to spend billions of dollars on new capacity in a market where the policy is taking you in the other direction?”
On top of that is persuading potential lenders to buck the tide of animosity toward energy companies and to pledge the money for new equipment when the loan term could run 30 years or more and some think the industry won’t even be around then. That perception is likely wrong, but it’s out there.
Then there’s Europe The issue compounds when you look at the refining industry in Europe, which also has shrunk in recent years as those countries have concentrated huge investments in renewables, even though they remain seriously dependent on Russian oil and gas.
As a result, significant cargoes of U.S. refined products already are being sent across the Atlantic.
Europe has mandated a reduction of Russian oil imports of 90% by the end of the year, just allowing imports by a few select countries.
That means huge disruptions for refining operations that have been using Russian crude for decades. Refineries are built for a specific type of crude oil and can’t run efficiently on other grades without expensive alterations.
Plus there’s the issue of getting the crude to the refinery.
Two neighboring refineries in Germany illustrate the dilemma, as Reuters reported recently.
The PCK refinery in Schwedt is Germany’s fourth largest. Majority owner is Russia’s state-controlled Rosneft Oil Co., adding a further wrinkle. Down the road is the Leuna refinery owned by TotalEnergies. Both are supplied with Russian crude via the Druzhba pipeline.
Plans call for those refineries to be switched over to crude mostly shipped to the Gdansk port in Poland and then moved to the refineries by pipeline, according to Reuters. Except the pipeline doesn’t have the capacity to carry enough crude for the two operations, so there’s talk of getting a fleet of tanker trucks to move the oil from port to refinery that way. Not cheap.
The actual oil coming into the port could be a mix of cargoes from Norway, the Middle East, West Africa and even the United States. So the refineries will be looking at different grades from different sources with different characteristics and different impurities that need to be removed in processing.
That’s a lot more complicated than using the consistent chemistry of the Russian Urals crude.
More than likely, unless the Russian oil ban is lifted soon, these refineries will need expensive alterations.
Other European refineries are in similar situations, with facilities that are often old and have existing maintenance problems, as any complex web of high temperature, high pressure vessels and piping is sure to do. The PCK refinery in Germany was built in 1960 and has used Russian oil the entire time since.
New car ban Meanwhile, Europe is no more supportive of fossil fuels than California, whose policies Chevron’s Wirth outlined. Maybe less.
On June 8, the European Parliament voted to ban sales of new diesel and gasoline-powered cars and vans in 2035. The United Kingdom has already mandated that new vehicles in that year must have zero tailpipe emissions and could stop sales of those vehicles as early as 2030.
So that is the environment in which new investments to retool or expand refineries in Europe and elsewhere will be judged.
So, barring a huge decline in demand through a major recession, the refining industry is likely to essentially run in place for the foreseeable future.
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