The recession has taught downstream market watchers to be skeptical of any new refinery ventures and one of the latest rumors appears to be especially unlikely.
Several media outlets recently picked up a story from a Middle East news site that said Kuwait and Louisiana were taking another look at a joint venture refinery in the US Gulf Coast state, citing unidentified sources. The report said Kuwait was mulling the plan as compensation for dropping out of a more than $17 billion petrochemical deal with Dow Chemical late last year.
While it is true that three years ago Kuwait and Louisiana's governor, Kathleen Blanco, signed a memorandum of understanding to investigate a new greenfield refinery, last week's story looks to be without merit, at least from a straight supply-demand angle.
The world has changed quite a bit since Kuwait and Louisiana were looking at the project, with a great deal of other capacity slated to come on line (albeit delayed and sometimes cancelled) and shaky product demand forecasts, especially for the US.
One big change in Louisiana, taking place this year, is the startup of significant new refining capacity at Marathon's Garyville refinery by year-end. The plant's 245,000 b/d crude capacity will be increased by 180,000 b/d and provide an additional 7.5 million gal/d of transportation fuels.
There was also the start this year of India's big Jamnagar refinery, with exports earmarked for the US and other countries.
Next year, the Saudi-Shell joint venture Motiva plans to bring new refinery units onstream at its Port Arthur, Texas, plant, that will raise capacity to 600,000 b/d from 325,000 b/d and create the US' biggest refinery.
All this is coming at a time when refiners are ratcheting back their run rates. At this point, refiners have said smaller, less economic plants need to be shut so a floor can be put under their sinking margins. The CEO of Alon, Jeff Morris, said during his company's latest earnings call he thinks as much as 10% of US capacity will need to be idled over the next several years to boost plant utilization.
"I'm of the premise that we're entering another phase of refinery consolidation in the US," he said, citing "major consolidation" phases in the 1980s and 1990s. In the early 1980s, US refinery utilization dropped below 70%, and "it took a couple of decades closing up refineries" to raise that to more than 90%, he said.
"Now we're in the low 80s [utilization], which is not a good place for industry. I'm personally of the view that about maybe as much as 10% of the US refining capacity will need to be idled over next several years to get the utilization rate back up to the levels we'll need, especially if I'm correct that gasoline demand growth rates will stay negative."
One of the more direct comments on refining came from Thomas O'Malley, CEO of European refiner Petroplus, during his company's earnings call in August. O'Malley, a former US refiner who first coined the term "golden age of refining" to describe happier times for the industry, said the industry is now entering "the age of reason."
A new refinery in Louisiana does not appear to fit with the new era.
Leave a comment