Aggressive Refinery Turnarounds Should Boost Summer Supplies of U.S. Motor Fuels

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--U.S. gasoline supplies this summer should be plentiful, now that two large refiners are back in service and the industry has performed maintenance on a large amount of its processing capacity, according to Dave Elpers, a petroleum refining specialist with IIR Energy. "As we move closer to the summer driving season, we expect the return of refining capacity that has recently been offline due to turnarounds will result in an increased amount of refined product in PADD III and PADD V," he said in an interview.

Elpers noted that Chevron Corporation (NYSE:CVX) (San Ramon, California) brought its Richmond refinery back online last month after an August 2012 fire stopped production. That refinery's 240,000-barrel-per-day (BBL/d) crude distillation unit (CDU), offline since last August 6, resumed operations April 26. Gasoline prices on the West Coast spiked last summer when the Richmond refinery shut down.

Another large refinery, Motiva's Port Arthur plant, became fully operational last month as well. After the much-publicized disruption during the startup process last summer, the newly constructed 325,000-BBL/d crude unit became fully operational in December 2012. That unit accounted for nearly one-third of the refiner's 600,000-BBL/d processing capacity. That refinery is owned by Motiva Enterprises LLC (Houston, Texas), a joint venture between Royal Dutch Shell plc (NYSE:RDS.A) (The Hague, The Netherlands) and the Saudi Arabian Oil Company (Dhahran, Saudi Arabia).

"Having these refiners back online will add a meaningful amount of new supply of refined products, especially gasoline, when compared to the start of last year's summer driving season," Elpers said. "Richmond and Port Arthur represent almost 600,000 BBL/d of refining surplus when compared to 2012."

Elpers also noted that refining operations are scheduled to resume soon at the massive Whiting Refinery, owned by BP plc (NYSE:BP) (London, England), which has been undergoing a multibillion-dollar series of upgrades to process mostly Canadian heavy crude. The last of those upgrade projects is scheduled to be completed sometime during the third quarter, but Elpers said there was some talk in the market that the refinery could return to service early.

The Whiting refinery upgrade project will allow BP to take advantage of deep discounts on Canadian heavy oil, the IIR Energy analyst noted. Because of constrained outbound transportation capacity, Canadian heavy oil is priced well below Brent, West Texas Intermediate and Bakken Light crudes.

"We're entering the summer driving season looking at a lot of production capacity, because the prior months have seen a lot of turnaround activity," Elpers said. "As planned maintenance winds down from such a high level of turnarounds during the first and second quarter, we expect refiners to have a very productive summer."

Across the U.S. during the first quarter, scheduled and unscheduled refinery turnarounds jumped sharply compared to the five-year average, according to IIR Energy's PetroCast Live service. During a typical first quarter, about 782,000 BBL/d of refinery capacity undergo turnarounds. But this year, turnarounds were scheduled for about 1.2 million BBL/d of refinery capacity, an increase of about 32%.

The pace slowed in the second quarter, but scheduled and unscheduled turnarounds still remained about 17% above average. Maintenance projects are scheduled for about 1.3 million BBL/d of capacity, up from about 880,000 BBL/d over the previous five years.

Click on the images at right for graphics showing sharply higher scheduled and unscheduled refinery turnarounds for the first and second quarters, compared to their respective five-year averages.

Increased motor fuel supply should work to counter seasonal price increase pressures, but Elpers cautioned there's no guarantee about what motorists will pay at the pump during the summer driving season, which traditionally runs from Memorial Day through Labor Day. One added market uncertainty this summer is how much of this new processing capacity will find its way overseas.

U.S. exports of refined products, particularly gasoline and diesel, have grown in recent years. Exports may rise this year for another reason: In the domestic market, motor fuels are required to comply with the federal Renewable Fuel Standard (RFS), which involves purchase of Renewable Identification Numbers (RINs). But exported motor fuels reduce the refiner's RFS obligation. Elpers noted that RINs prices have shot up in recent weeks, which raises the possibility that refiners may find it economically advantageous to export their product rather than purchase RINs to sell their product domestically.

"Motor fuel exports are going to be a very important part of the refinery story over the next few months," Elpers said. "The refiners have hit their 'blend wall' with ethanol. Buying RINs to comply with the RFS adds another cost to a business that has historically had thin margins. I would not be surprised if some of this summer's incremental output of motor fuels found its way to overseas markets."

Subscribers use PetroCast Live to stay abreast of refinery turnarounds, new project announcements, industry trends and news in the petroleum refining business.

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