Refinery Capital and Maintenance Spending Projected to Rise in 2010, but Margins Will Remain Thin

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--U.S. oil refiners will increase spending on capital and maintenance projects in 2010, but large stocks of refined product mean continued thin operating margins for refiners, at least for the first half of 2010, according to Chris Paschall, Industrial Info's vice president for research for oil & gas industry markets.

Click on image at right for details of the changing proportions of active and "fallout" projects from 2006 through 2010.

Paschall was speaking to about 300 attendees at Industrial Info's "Twenty-Ten North American Industrial Market Outlook," held November 10 at the White Oak Plantation in Baton Rouge, Louisiana. Attendees represented a broad spectrum of industry: equipment vendors, distributors, manufacturing firms, engineering and construction firms, labor unions, and financial service companies. The "Twenty-Ten Industrial Market Outlook" event coincides with Industrial Info's release of the 2010 Global Industrial Outlook, which highlights the industrial spending forecast for the coming year. Since 1993, IIR has published a forecast for capital and maintenance spending for the industrial market in North America, and the 2010 outlook marks the fifth year of projecting spending estimates around the world.

"The next nine months will be rough for refiners unless we have a really cold winter that drains the surplus refined product from the market," Paschall said. "Right now, refiners are having a tough time."

The U.S. is already an over-supplied market, and the supply-demand imbalance will be further aggravated with this year's addition of new refining capacity, which totals about 1.8 million barrels of oil per day (BBL/d). This year's major new refinery capacity additions were:

• China added 800,000 BBL/d
• India increased capacity 705,000 BBL/d
• The U.S. added 185,000 BBL/d
• Vietnam added 140,000 BBL/d

Although crude oil prices have declined from their mid-2008 highs, refining margins have fallen faster, keeping downstream profitability thin, Paschall said. U.S. gasoline demand rose "slightly" compared to year-earlier demand, increasing slightly less than 2% per month during the recent summer driving season, he said. But U.S. distillate demand continued to decline compared to year-earlier levels. Distillate inventories are at a 26-year high.

Looking forward to 2010, Paschall said that Industrial Info's forecast models removed two U.S. grassroot refinery projects from its listing of "active" projects. These projects, with a total investment value (TIV) of $4.8 billion, have been listed as "active" for several years, but neither project has moved forward. Paschall also removed three grassroot refinery projects from IIR's "on hold" list. These three refineries carried a TIV of $27.5 billion, he told the Baton Rouge audience.

With these projects removed from active and on-hold status, Industrial Info is tracking $4.84 billion in major capital projects for U.S. refiners that could start construction next year. "Based on what we have confirmed, 2010 will be another slow year for capital investments," Paschall said. "We expect to see an increase in 2010, but it will be small compared to the high rate of investments we've seen in recent years." In 2008, Industrial Info confirmed more than $12.4 billion in capital investments that started construction. In 2007, this number was $5.59 billion. In 2010, the regions with the greatest number of projects and largest capital expenditure are expected to be the Southwest, Southeast, and Midwest, Paschall noted.

Paschall said that 2010 Refining Industry capital projects included a total of about $2.3 billion for unit upgrades, benzene reductions, and consent decree remediation projects for the U.S. Environmental Protection Agency. He said that there was a high probability that these three categories of capital projects would move forward. Paschall said there was less certainty about the $1.4 billion in refinery expansions scheduled to begin next year. Given that the U.S. is an over-supplied market with weak margins, refiners may find it difficult to launch capital projects until margins improve, he said.

Click on image at right for details about spending for refinery turnarounds from 2007 through 2010.

Paschall had better news on U.S. refinery turnaround projects. He sees significantly higher spending in 2010 compared to spending in prior years. Paschall predicts refinery turnaround spending of $910 million during the first half of 2010, and $574 million for the second half of the year. By contrast, U.S. refiners spent $478 million on turnaround projects during the first half of 2009. An additional $344 million is projected to be spent during the second half of this year. For more on refinery turnaround projects, see related article from November 5, 2009 - Refinery Turnarounds: Best of Times, Worst of Times.

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy related markets. For more than 26 years, Industrial Info has provided plant and project opportunity databases, market forecasts, high resolution maps, and daily industry news.