North American Petroleum Refining Industry Could See Five-Fold Increase in Capital Spending in 2008 Compared to 2006

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Researched by Industrial Info Resources (Sugar Land, Texas)--The North American Petroleum Refining Industry’s spending trends are showing year-over-year increases from 2006-08, mainly driven by multi-billion-dollar capacity expansion projects in Canada and the United States. Industrial Info is already tracking 349 projects totaling more than $35 billion scheduled for construction kickoff in 2008.

Click on the image at right to view a chart showing the breakdown of project spending in 2008.

This is a substantial increase from 2007, which has 263 active projects either under construction or scheduled to begin construction by the end of the year, totaling more than $20 billion. The forecast for 2008 represents a five-fold jump in project spending compared with 2006, which was a depressed year for spending with about $7 billion in projects moving forward.

A major trend affecting refineries across North America involves converting, modernizing and expanding refineries to process sour crude oil from western Canada and abroad. Companies are trying to either convert from sweet refining to sour refining, or they are trying to displace some of the sour crude that comes from unfriendly territories, such as Iraq and Iran, where the supplies of crude oil aren’t too reliable. To adapt to the change, companies like BP (NYSE:BP ) and ConocoPhillips (NYSE:COP ) are planning for major upgrades. BP’s facility in Whiting, Indiana, is spending about $4 billion to be able to run heavy sour Canadian crude; however, the company must first work to ease public outcry over the several problematic incidents it has had. The biggest complaint is that BP would be increasing waste discharge into Lake Michigan.

Some of the Refining Industry’s other big projects include about 10 grassroot refineries from between now and 2012 worth about $33 billion: four in Canada, five in the U.S. and one in Mexico. Those plants will have a total combined capacity to produce about 2 billion barrels of crude oil per day. Planned expansions at existing North America refineries could add an additional 1 million barrels per day of capacity. If constructed, these capacity increases represent a 14.6% increase from the current 20.5 million barrels per day North American capacity.

Many refineries are evaluating what they’re doing and gearing up for the next environmental mandate (2010-12), which will call for removing benzene out of the gasoline pool. From 2004 to 2006, the Refining Industry experienced heavy cost burdens because it was coming off of several environmental mandates, including low-sulfur gasoline and ultra-low-sulfur diesel. During that period, the refineries worked to comply with the mandates to simply stay in business, but there weren’t many projects or opportunities to bring in revenue. So for the 2007-10 period, companies are planning to kick off several projects, including some multi-billion-dollar projects, to turn that around. Most projects are capacity expansions, particularly because the permitting process for an expansion is much easier to obtain than it is for a new plant. And after years of being closed due to funding issues, several smaller refineries plan to restart, backed by hedge funds and entrepreneurial endeavors to find funding from investors, to add about 100,000 barrels a day into niche markets like diesel and jet fuel.

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