A year ago, it was conventional wisdom everywhere: the US needed to build new refining capacity. The fact that it had not was a national disgrace, according to numerous pundits.
Take, for example, the June 2, 2008 posting by Dr. Mark J. Perry, a professor at the University of Michigan at Flint. He writes on the widely-read Carpe Diem blog.
"For the wealthiest, most powerful nation in the world this is a ridiculous situation that will only get worse as our insatiable demand for gasoline keeps growing and refinery capacity falls further behind in the coming years," he wrote. "Just a few new refineries would alleviate the problem and help keep our gas prices lower and steadier."
He then went on to implicitly blame environmental activists for blocking new refineries, and did specifically cite the Arizona Clean Fuels project, which is still kicking.
Who can argue with that? Anybody who knows anybody about refining.
It's true that environmental opposition to a new refinery probably would have been strong. But the fact is that the refining industry has been such a lousy business for so long that nobody even wanted to build a new refinery, though debottlenecking and new units within existing refineries did boost overall output. But refining was such a poor business that when Valero bought the Basis Petroleum refineries in the latter part of the 1990's, the economics of refining were so bad that Valero paid between 10-15 cts on the replacement dollar. Who would build a new refinery when you could buy one that cheaply?
Last week, while in Singapore, The Barrel had meetings with various traders at which the subject of Reliance Industries' Jamnagar project was a focus of discussion. The question was in an era of depressed demand and weak refining margins, whose market share was going to have to give way to make room for the giant -- and cutting-edge -- new refinery that has capacity of 580,000 b/d?
The consensus? Refining capacity in Japan is at risk, given the weak economy there and an aging, shrinking population with a demand for petroleum that is destined to keep dropping (and without a tradition of being a significant exporter of products).
The other at-risk refining center is the United States. In fact, a year after the handwringing over lack of building a new refinery, there are whispers that some refining capacity in the US may close. There are no names attached to the speculation (well, maybe some names, but they don't mean much), but the macreconomic view is that certainly a US refinery could be buffeted by new capacity elsewhere, including Reliance Industries' new refinery at Jamnagar, India, poor refining margins, credit constraints and weak US demand.
Jamnagar already is getting awfully close to home. About a month ago, Platts' Esa Ramasamy reported that Reliance USA, a subsidiary of Reliance Industries, has taken taken 1.3 million barrels of clean product storage in the New York harbor area. "We concluded a deal with Hess to take storage at the Port Reading and First Reserve terminals," a Reliance source told Platts. The Port Reading terminal is located in Port Reading, New Jersey, and the First Reserve terminal is in Perth Amboy, New Jersey.
The acquisition of storage at the Port Reading and First Reserve terminals will enable Reliance to participate in the New York Harbor barge and Buckeye gasoline and diesel markets. "Now Reliance can be expected to be a supplier of heating oil to the US Northeast too," said a New York Harbor trader at the time.
And in Asia, more recently, Platts' Singapore correspondent Irene Tang reported that two South Korean cargoes of gasoline were headed to the US West Coast. The move is not particularly radical, but it's notable that in her report, she also said: "...the projected startup of Indian private refiner Reliance Industries Limited's fluid catalytic cracker at
its newly built 580,000 b/d refinery in Jamnagar in late April would also add to the availability of lower octane gasoline for Asia." And if Asian demand for that gasoline doesn't rise, the competition for the demand that exists could be fierce.
The US Energy Information Administration issued a report this week noting that lower refined product demand, combined with greater ethanol use in gasoline, has reduced the current US need for refining capacity. The people running the new refinery at Jamnagar probably won't be too impressed with that. Their plans are clear; they are interested in the US market. Will all refineries now operating in the US be able to withstand the challenge?
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