U.S. Refinery Turnarounds Keep Consumers, Traders, Regulators Happy

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The traditional summer driving season starts on Memorial Day, but U.S. motorists aren't waiting until May 26 to hit the road. As the long, cold winter of 2013-14 fades in the rear-view mirror, weekend drives and local "staycations" are boosting consumption of refined petroleum products like gasoline and diesel fuel. Transportation fuel should be plentiful this driving season for two reasons: Production of domestic crude oil is surging, and U.S. refineries have made billions of dollars in investments to meet consumer demand by maintaining, upgrading and expanding their facilities.

Click on the image at right to view historical levels of major turnarounds at U.S. refineries.

"The surge in domestic crude-oil production is great news, and it gets a lot of media attention," said Paul Copello, president of IIR Energy. "But crude oil, on its own, is of little use to consumers or businesses. It's the refineries that turn it into high-value transportation products like gasoline, diesel and jet fuel. Refiners have been flexing with the market, making big investments in maintenance turnarounds, unit additions and modifications, environmental upgrades and capacity expansions, to ensure supply of transportation fuels meets demand."

Most of the new domestic crude oil being produced is light and sweet, and can be a much different quality, compared with the crude-oil slates refiners have traditionally processed. But processing that lighter, sweeter grade of domestic crude requires refineries to make significant investments in crude distillation units (CDUs), hydrocracking capacity, cokers and other equipment.

"North American refiners will spend at least $1 billion this year to improve their flexibility to process a variety of crude slates, mainly light sweet crudes, and at least $2 billion for that in 2015 and beyond," Copello said. Refiners also are upgrading their facilities to produce more diesel and gasoline from each barrel, he added.

Refiners install a lot of this new equipment during maintenance turnarounds, said Dave Elpers, a refinery specialist with IIR Energy. Each year, on average, U.S. refiners perform more than 200 major turnarounds, which range from simple tune-ups and maintenance to installation of major pieces of equipment, like crude distillation units, condensate splitters, hydrotreaters and fluid catalytic cracking units.

Historically, refiners in the Corpus Christi market processed imported heavy crude oil with a relatively high percentage of sulfur, Elpers said. "But the crude being produced today in the Eagle Ford Shale is very light and sweet, with a high level of condensates. Processing the lighter crude and condensate requires installation of splitters and other equipment, which refiners in Corpus [Christi] have done. Because of that investment, refiners in that area are importing less heavy crude, and processing a blended slate of imported heavy crude and domestically produced light crude and condensates." In a recent turnaround, Valero Energy Corporation (NYSE:VLO) installed hydrotreaters to remove sulfur from gasoline produced at its Three Rivers Refinery in Corpus Christi. That ensured the refinery's product slate complied with tightening federal standards on the sulfur content of transportation fuels.

It was not that long ago that refiners in and around Houston, like their brethren in Corpus Christi, imported the majority of the crude they processed, Elpers said. At one point, Gulf Coast refiners imported up to 7 million barrels of oil per day (BBL/d). Most of that crude was processed in the Houston, Louisiana and Port Arthur areas, but some was transported northward by pipeline.

Elpers said that the Gulf Coast market, particularly the Houston area, has shifted dramatically in recent years: Today, crude-oil imports are down sharply and a lot of domestic light sweet crude is flowing from the Midcontinent southward to Houston, where it is processed and, increasingly, exported in the form of refined products. Without those investments in CDUs, fluid catalytic crackers and other processing equipment, Houston would be behind the eight-ball when crude slates shifted. The Pasadena refinery in Pasadena, Texas, is one of many Houston-area refiners that have added or upgraded their fluid catalytic cracking units to produce more transportation fuels. That refinery is owned by oil giant Petrobras (NYSE:PBR) (Rio de Janeiro, Brazil).

The Gulf Coast is also emblematic of another strategic change in the U.S. refined products market. "As a nation, we have moved from being a larger importer of refined products like gasoline, diesel and jet fuel to a large net exporter of those products," Elpers said. "When there was a domestic slowdown in demand for refined products during the recent recession, we were able to increase exports of those products, a trend that has continued and expanded. Exports of refined products are an important growth engine for refiners. But today's exports are made possible by upgrades and turnarounds completed in prior years. One example of this is the recently completed $1 billion vacuum gas oil hydrocracker unit addition at the St. Charles Refinery, owned by Valero Energy, which will lead to the production of more distillate, a good bit of which will be exported."

"Refiners in Chicago and the Midwest also have flexed with the changing market, installing equipment to process more Western Canadian Select (WCS) crude oil, which has different properties than the slates they were processing," Elpers noted. "BP plc (NYSE:BP) (London, England) spent more than $3 billion to reconfigure and upgrade its refinery in Whiting, Indiana, to process a slate that is predominately WCS. By installing a high-pressure gas oil hydrotreater and other equipment, BP was able to process the higher-content sulfur crude from Canada.

Elpers noted: "The basic science behind refinery turnaround has been the same for years: Add heat and pressure, make necessary adjustments, reintroduce heat and pressure. What has changed, and will continue to change, are the crude slates and environmental regulations. Keeping refineries optimally operating in a dynamic market is what happens during a turnaround. Turnarounds have a critical effect on market prices for crude oil and refined products. You cannot trade crude oil or refined products without a firm understanding of who is going into a turnaround, and when.

"In prior years, turnarounds focused on increasing a refiner's diesel output and expanding refineries in and around Cushing, Oklahoma. Today, turnarounds are increasing the capacity of refiners to process a wider range of crude oil slates--from heavy sour WCS to light, sweet grades from the Eagle Ford and Bakken. Refiners in the East Coast and West Coast are receiving crude by rail, which reduces their reliance on waterborne shipments. To accommodate these new slates, refiners on both coasts have also invested in upgrades during turnarounds."

"Refining continues to be a dynamic market, but one unchanging factor in that market is the centrality of turnarounds," Elpers said. "Turnarounds are how the industry stays ahead of changes in consumer demand, crude-oil inputs and federal regulation. Huge production gains in crude oil don't mean much if we can't turn it into usable transportation or heating fuels."

Elpers noted the greater interconnectedness of each stage of the petroleum process--exploration and production, transportation, refining, storage, export terminals--is why IIR Energy is moving toward a COMMODITIES LIVE platform. "An integrated view of the market, from drill bit through pipelines, refineries and storage tanks, will provide traders and other market participants the ability to see how all the pieces fit together, allowing them to avoid bottlenecks and execute more profitable trades," he said.

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