By Robert Campbell
NEW YORK, March 29 Three months of decent oil
refining margins in the Atlantic basin may be enough to save as
many as seven of the 10 plants threatened with closure, which in
turn ought to be enough to crush margins once again.
Only a few months ago, gasoline futures were mired in a deep
depression as shrinking demand for the fuel in North America and
Europe and costly crude combined to wipe out the profitability
of many of the least efficient regional refineries.
Fast forward to today and margins are much healthier, buoyed
not by improved demand or tighter inventories but mainly by
optimism that the supply picture will be much tighter than
before with many refineries poised to shut down.
Except there is one problem. A lot of these refineries may
not close and some that are shut down could even restart. If
they do not close, is it really realistic to expect the good
margins to persist?
Already bids are coming in for all five refineries belonging
to insolvent independent European refiner Petroplus.
When the company ran into financial troubles, analysts expected
only its two best plants in Germany and Britain to survive.
ConocoPhillips extended the bidding for its
shuttered 187,000 barrels per day Trainer, Pennsylvania refinery
earlier this week. Shut down since September, it will likely
require millions of dollars of work just to restart.
The plant has reportedly received "multiple bids" according
to local media reports.
Optimism is even brewing up that Sunoco's 335,000
bpd refinery in Philadelphia may be bought before its July
So instead of some 2 million bpd or more in refining
capacity being taken out of the system this summer, the decline
could be as less than 1 million barrels.
If only the 350,000 bpd Hovensa and 235,000 bpd Aruba
refineries in the Caribbean are shut, along with Sunoco's
178,000 bpd Marcus Hook refinery on the U.S. East Coast, then
gasoline bulls could be in for a nasty surprise.
After all, Marcus Hook has been closed for months now and
the impact of the Hovensa and Aruba shutdowns is now being felt
in the market. And let's not forget that Aruba made little in
the way of finished refined products.
That means the current supply situation may be as good as it
gets in terms of gasoline in the Atlantic basin. And of course
this is before we get out of the spring turnaround season which
should see operating rates rise at the surper-efficient U.S.
Gulf Coast refineries.
GREAT MINDS THINK ALIKE
If only one or two plants came back from the dead, it would
not be a big problem. With plenty of capital looking for better
returns and lots of cheap refineries on the block, a contrarian
bet on refining could well be a winner.
Even if the plants on offer are mostly dogs, with limited
capacity to process cheaper crude oil, high energy costs and so
on, they can turn a profit if bought cheaply enough.
The problem here is too many people are having the great
idea of snapping up refineries on the cheap in the hope of a
The more likely result is a vicious downturn in margins and
yet another fight to the death as the more efficient refineries
in the Atlantic basin wait for their competitors to once again
go out of business.
Nor does it seem likely that a deep-pocketed investor is
going to step in and absorb millions of dollars of losses while
hugely expensive upgrades are funded.
After all, the Atlantic basin is not likely to become a
growth market again and none of the plants up for sale is a
really suitable export refinery.
So why is anyone getting involved here? In part, it may be a
hope to repeat the success that some investors had in the late
1990s and early 2000s.
A more likely result is a rerun of the Petroplus saga: an
under capitalized, and ultimately futile attempt, to catch a