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U.S. Refinery Project Spending Seen Rising in 2012

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Project spending in the U.S. Petroleum Refining Industry will increase about 4% this year, to about $18.34 billion, up from last year's outlays of $17.56 billion and 2010's spending level of $16.4 billion, according to Chris Paschall, Industrial Info's vice president of research for the Petroleum Refining Industry. In an exclusive "Navigating the Currents of Change" webcast, Paschall predicted refiner capital project spending will increase 1.6%, to $12.66 billion, in 2012. U.S. refiners have scheduled about $5.68 billion of maintenance spending this year, a 5.8% increase over last year's maintenance spending levels, he added.

"In 2012, we see a lower number of refinery turnarounds, but at a higher average per-turnaround price, helping drive an increase in overall U.S. maintenance spending," Paschall continued. Industrial Info is tracking 187 scheduled turnaround projects this year, a dip from the 221 turnarounds scheduled for 2011 and 241 planned for 2010. Seasonally, this year's turnaround schedule includes 111 projects in the spring and 76 projects in the fall, for a total of 187 turnarounds in 2012.

Over the last three years, more than 125 refinery projects in North America have been restarted. These projects are worth about $17.5 billion. "A lot of projects were placed on hold, or cancelled outright, when crude oil fell to $32 per barrel a few years ago," Paschall said. "But now, with crude oil prices stabilizing in the $100-per-barrel range, refiners have reactivated a lot of inactive projects."

But Paschall cautioned that crack spreads will critically influence which refinery projects move forward and which are delayed. Crack spreads are the difference between crude oil input costs and refined product prices. For Gulf Coast refiners processing West Texas Intermediate (WTI), crack spreads fell for about five months during the second half of 2011, before rebounding in January 2012. Currently, gasoline crack spreads for Gulf Coast refiners using WTI are about half of what they were during the late summer of 2011. Spreads have only recently turned positive for Gulf Coast refiners using Louisiana Light & Sweet (LLS), a proxy for Brent crude oil.

Gulf Coast crack spreads for diesel, on the other hand, are stronger than for gasoline regardless of what crude oil slate a refiner is running, Paschall said, noting that those spreads are higher for Gulf Coast refiners using WTI compared to refiners processing LLS.

U.S. drivers are paying a high price for fuel these days. Paschall said one reason for that is the closure of three East Coast refineries, which removed about 1 million barrels of crude oil processing capacity per day from the market. Another factor is the high level of U.S. gasoline exports, which reached about 626,000 barrels per day (BBL/d) in late 2011. Distillate exports briefly topped 1 million BBL/d in late 2011, before declining to about 900,000 at yearend.

"A lot of those exports went to Latin America," the Industrial Info vice president said in the "Navigating" interview. "Demand for refined products is rising there, and Latin American refineries have been configured to process a slate of Middle Eastern crudes, which have been harder and more expensive to get recently. As a result, some Latin American refineries have been shut down, leading to greater imports of finished products."

Paschall said this trend--higher U.S. exports of refined products--shows the global nature of the crude and refined products markets. The global refining market is scheduled to add about 3 million BBL/d of new processing capacity by yearend 2013. By contrast, only about 500,000 BBL/d of new capacity came online last year, and a combined 2 million BBL/d of new processing capacity began operating in the 2009-10 period.

Paschall noted that a lot of crude oil currently is stockpiled in Cushing, Oklahoma, constrained by a shortage of outbound pipeline capacity to Gulf Coast refiners. This has forced refineries along the Gulf Coast to process Brent or LLS crude, elevating the price of those crudes and imposing a penalty on WTI. For more on this issue, see December 29, 2011, article - Strong Global Demand for Refined Products Drives U.S. Refiners' Project Spending Plans.

While some have predicted that the completion of outbound pipelines from Cushing over the next year or two will lead to lower retail gasoline prices, Paschall isn't so sure: In a market characterized by strong global demand growth, the retirement of aging refiners and limited new capacity additions, he said new crude oil pipelines will serve mainly to lower or eliminate the price penalty on WTI--meaning WTI would increase to near price parity with Brent and LLS. He doubted that higher input costs for Gulf Coast refiners would lead to lower prices at the pump. But with much of the country paying nearly $4 per gallon for gasoline, he acknowledged that crossing that psychologically important price barrier could cut into U.S. consumer demand--which would free refiners to increase exports of refined products.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.