August 9, 2013 / 3:46 PM / 5 years ago

COLUMN-U.S. refiners eye shale butane to cut gasoline costs: Campbell

By Robert Campbell

NEW YORK, Aug 9 (Reuters) - Cheap natural gas liquids in the United States have made the country’s petrochemicals industry globally competitive again. Now oil refiners are looking at this bounty with an eye to making U.S. gasoline exports more competitive.

At first glance it is not immediately clear how butane would make U.S. refiners more competitive. Traditionally butane has been blended into gasoline, but increasingly stringent anti-pollution regulations limit how much butane can be added to fuel, particularly in warmer months.

But an abundance of cheap butane has refiners on the U.S. Gulf Coast looking seriously at expanding or even building new alkylation plants that use butane derivatives to create valuable high octane gasoline blendstocks.

Valero Energy, the largest independent U.S. refiner, disclosed during its most recent quarterly earnings conference call it was studying expansion of alkylation capacity at its Gulf Coast refineries.

The new or revamped units would likely use sulfuric acid technology, Valero Chief Executive Bill Klesse said on the call, perhaps costing as much as $300 million.

Such a large investment would be almost impossible these days to justify in many U.S. refineries without recourse to the gasoline export market. U.S. gasoline consumption is trending lower and Gulf Coast refiners are already being forced to turn to export markets to sustain the high operating rates that are crucial to profitability.

But export refining is a tricky business. The more distant a refinery is from its target market, the more the cost of shipping eats into profit margins. For many U.S. refiners, capturing more market share in Latin America and West Africa, the two major gasoline import markets in the Atlantic basin, means finding ways to cut their production costs to increase competitiveness.

Cheap butane may well be an arrow in their quiver. Butane on the U.S. Gulf Coast is worth only $55 a barrel, far below the cost of the cheapest crude oil .


Butane is cheap because U.S. shale gas drillers, which have targeted liquids-rich gas plays to compensate for plunging natural gas prices, have driven U.S. butane output up to levels unseen since the early 1980s.

A lack of export capacity means butane producers are forced to compete on price to find a home for their production. Even as U.S. export capacity grows, oil refiners expect the difficulties inherent in chilling and liquefying butane for export to ensure that domestic prices remain well below world prices for some time.

Thus the logic behind expanding alkylation capacity is clear. With the use of a cheaper feedstock than oil, the resulting product can be sold for less and still be profitable. That in turn will help U.S. refiners extend their reach by making U.S. gasoline exports more competitive in distant markets.

All this is bad news for European oil refineries. Europe’s oil refining industry is heavily dependent on gasoline exports to West Africa because of dwindling domestic demand for gasoline.

Europe’s main competitive advantage in Africa is proximity, which keeps shipping costs relatively low. Otherwise European refineries have relatively high costs. Unlike U.S. Gulf Coast refiners, they pay a high price for natural gas and find themselves increasingly squeezed by declining Russian crude oil exports.

In contrast U.S. refineries enjoy cheap fuel due to the shale gas boom while rising American crude oil production is cutting into feedstock costs. Indeed, the situation would likely be worse already for European refineries except that many U.S. refiners have infrastructure limitations that inhibit gasoline exports.

Many Gulf Coast refineries run their gasoline output immediately into pipelines that feed domestic markets, but gasoline for export must be first pumped into storage to allow the fuel blend to settle.

Due to a shortage of tank space and dock facilities, many U.S. refiners have not yet fully emerged on the global gasoline market. But all the big refiners have disclosed plans to add dock and storage capacity to support gasoline exports in the near future.

The scramble to step up export capacity will keep U.S. domestic gasoline prices roughly in line with the rest of the world even if shale oil and gas output does provide some cost advantages for refiners.

Nevertheless the emergence of the United States as a significant gasoline exporter will have important implications for global oil trade flows, particularly if European refinery shutdowns result.

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