Refinery Turnarounds: Best of Times, Worst of Times

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Stand-alone U.S. oil refiners may be forced to postpone maintenance turnarounds during the next few months because of difficult market conditions, according to Chris Paschall, Industrial Info's vice president of research - Petroleum Refining Industry. But these same market conditions could drive an increase in turnaround projects at the U.S. refineries owned by integrated oil companies, he said.

"Refining margins are terrible right now, to the point where some independent refiners have had to reassure the market that they have sufficient cash to continue operating," said Paschall, adding that some U.S. refineries are temporarily closing units due to market conditions. Integrated oil companies, which combine oil exploration and production with petroleum refining and marketing, can better withstand dramatic changes in refining profitability compared to stand-alone refiners.

Click on image at right for a breakdown of refinery turnaround activity from 2006 through 2010.

Valero Energy (NYSE:VLO) (San Antonio, Texas), the largest stand-alone U.S. refiner, reported a third-quarter operating loss of $579 million in late October. In a conference call, Chief Financial Officer Mike Ciskowski said Valero expects large fourth-quarter losses as well. During the just-completed quarter, Valero closed its 235,000-barrel-per-day Aruba refinery for an indefinite period because of poor margins.

Marathon Oil (NYSE:MRO) (Houston, Texas) said its third-quarter gross refining and marketing margins fell to about $3.20 per barrel in the third quarter, down sharply from the $10.57 per barrel gross margins achieved in the third quarter of 2008. Marathon's refining, marketing and transportation segment saw profits fall to $158 million for the most recently completed quarter, down sharply from the segment's $771 million profit for the same period last year. Each quarter's results were affected by non-recurring items.

Integrated oil companies also saw dramatic declines in profits for refining and marketing for the third quarter. Chevron Corporation (NYSE:CVX) (San Ramon, California) reported an 89% decline in downstream profits compared to year-earlier results. Refining and marketing profits at Exxon Mobil Corporation (NYSE:XOM) (Irving, Texas) fell 88% compared to third-quarter 2008 results. Exxon Mobil's U.S.-based refining and marketing business lost $203 million for the quarter. Crude oil sold for about $70 per barrel for much of the just-completed quarter, so the profits booked by integrated oil companies' upstream segment cushioned against dramatic profit declines in their refining and marketing business.

Continued profitability for integrated oil companies, coupled with weak U.S. consumer demand for refined products and excess refining capacity, may cause those companies to accelerate their refinery turnarounds, Paschall said. "But stand-alone U.S. refiners can't spend money they don't have," he added. Refineries typically perform turnaround maintenance projects every four to six years. These projects require a refiner to temporarily stop refining activities at affected units.

"After hurricanes Katrina and Rita [2005] and Ike [2008] closed many U.S. refineries, we saw two distinct trends in refinery turnarounds," Paschall said. Some refiners moved scheduled turnarounds forward, while others postponed them. He said this two-track pattern could be repeating itself: "There's no unified trend on turnarounds right now, it all depends on a company's mix of assets, its cash position, consumer demand, and refinery capacity utilization.

"Right now, we have too much refinery supply chasing too little demand," said Paschall. Financial results for downstream operations--oil refining and marketing--have been hurt by high crude oil prices, slackening consumer demand, significant stockpiles of gasoline, and excess oil refining capacity. Gasoline supplies dipped slightly to 208 million barrels for the week ending October 30, according to information released Wednesday by the U.S. Energy Information Administration, the statistical arm of the U.S. Department of Energy.

The number of oil refinery turnaround projects jumped sharply during the first half of 2009 compared to 2008 levels, according to data tracked by Industrial Info. In early 2009, the effects of historically high gasoline prices from mid-2008, coupled with the sharp downturn in the U.S. economy, slashed demand for refined products and idled some refinery capacity. Market conditions convinced oil companies to perform turnarounds at that time, leading to a surge in turnaround activity, Paschall said.

The Industrial Info vice president said turnaround companies might want to focus their business-development efforts at the refining units of integrated oil companies. "Given the excess of supply and weak demand for refined product, performing a turnaround now makes a lot of sense, when a refinery wouldn't be making much money anyway. In fact, integrated oil companies might want to accelerate their schedule of turnarounds so that the units can operate at full capacity when margins come back."

Paschall identified the major companies providing turnaround services for refiners as:

• Jacobs Engineering Group (NYSE:JEC) (Pasadena, California)
• Fluor Corporation (NYSE:FLR) (Irving, Texas)
• Bechtel Gruop Incorporated (San Francisco, California)
• J.V. Industrial (La Porte, Texas)
• Turner Industries (Baton Rouge, Louisiana)
• Zachry (San Antonio, Texas)
• Nooter Construction (St. Louis, Missouri)
• Wyatt Field Services (Houston, Texas)

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.