September 7, 2011 / 5:15 PM / 8 years ago

COLUMN-Libya is last straw for Sunoco's refineries: John Kemp

(John Kemp is a Reuters market analyst. The views expressed are his own)

By John Kemp

LONDON, Sept 7 (Reuters) - Sunoco’s decision to put its East Coast Philadelphia and Marcus Hook refineries up for sale has probably condemned both to closure.

In a world where seaborne light sweet oils are much more expensive than landlocked U.S. crude and heavier and sourer imports, Philadelphia and Marcus Hook are the two worst refineries to own in the United States.

Both will struggle to find buyers, unless someone can be found willing to invest large sums of money to upgrade their desulphurisation and coking capacity, enabling them to improve margins by processing cheaper heavier and sourer crudes.

With so much pressure on margins and surplus refinery capacity in North America and Western Europe, the prospect of a saviour emerging seems remote.

Now the question is which refinery might be next up for sale or closure, with ConocoPhillips’ facilities at Bayway and Trainer seemingly most vulnerable.


The best way to understand why Marcus Hook and Philadelphia are such terrible assets to own is to look at a snapshot of the crudes they were processing in June (the latest month for which detailed data is available) compared with other refiners across the country.

In June, the United States imported 285.9 million barrels of crude oil. The weighted average sulphur content was 1.71 percent while the average API gravity was 28.34 degrees, according to company-level data published by the Energy Information Administration, the statistical arm of the U.S. Department of Energy.

Given the scarcity of high quality crudes with low sulphur content and high yield of premium products, as a result of the war in Libya and North Sea maintenance, most refiners focused on acquiring the cheapest and sourest oils their refineries could handle to maximise margins.

But struggling Sunoco imported 4.95 million barrels for Marcus Hook with an average sulphur content of just 0.17 percent and API of 36.8 degrees, much sweeter and lighter crude than other refiners. It also brought in 8.96 million barrels for Philadelphia with an average sulphur content of 0.18 percent and an API of 33.42.

Unable to reduce the sulphur content or crack heavier molecules more aggressively to wring more valuable light products from its crude, Sunoco’s buyers were forced to chase some of the most expensive crudes in the market.

In June, Sunoco brought in 3 million barrels of super-premium Nigerian light sweet for Marcus Hook, and another 3.5 million for Philadelphia.

Sunoco’s buyers also landed 1.5 million barrels of ultra-light Norwegian crude — so light it was virtually straight-run gasoline (the Norwegian crude had APIs of 46-47 degrees, compared with straight-run gasoline around 50 degrees). They went as far afield as Azerbaijan to obtain 750,000 barrels of light sweet crude.

The refinery processed some cheaper crudes from Angola, available at a discount because of their high acidity, to average down the acquisition cost. Even so, Sunoco’s refineries were paying among the highest average prices to buy crude oil for any refineries in the United States.

If the 96 facilities for which detailed import data is available are ranked in terms of the weighted average sulphur content of the crudes they imported in June, then Marcus Hook and Philadelphia were processing the 6th and 7th sweetest crude slates in the United States. The refineries processing sweeter imported oils were far smaller (Table 1).

In a ranking by API gravity, Marcus Hook and Philadelphia came in at 8th and 20th respectively. Of the big refineries, only ConocoPhillips’ facility at Trainer in Pennsylvania was bringing in lighter crudes in significant volume (Table 2).

It is not surprising that in a note published Tuesday, boutique energy investment bank Simmons & Co speculated Conoco’s Trainer or Bayway refineries could be the next on the auction block, though Conoco denied having any plan to sell them.


East Coast refiners’ margins have been under pressure as they struggle with old facilities, rising product specifications, and fierce competition from Europe for both crudes to process and share in the gasoline market.

Rivals in the Midwest are benefiting from cheap Canadian and North Dakota crudes trapped by the lack of export pipelines, while refiners on the U.S. Gulf Coast have larger and more complex facilities capable of buying heavy sour crudes and processing them into a higher share of valuable gasoline and distillate.

East Coast refineries have neither advantage. Most of their crude is imported, at prices linked to Brent rather than WTI, and their lack of complexity has forced them to buy the simplest and therefore most expensive crudes.

Sunoco has not been a large buyer of Libyan oil. In 2010, Marcus Hook and Philadelphia imported just 4 million barrels of Libyan crude combined, according to EIA data.

But loss of Libya’s exports and dwindling production from the North Sea, which pushed Brent-linked light sweet prices far above heavier sour grades, let alone WTI, proved the final straw for refineries that were anyway living on borrowed time.

In 2007, East Coast refiners paid on average about $4.50 per barrel above the national average — including $5.50 more than rivals in the Midwest and $5 above Gulf refineries. By June 2011, East Coast refiners were paying almost $11 above the national average, more than $17 above the Midwest and $9 above the Gulf Coast.

The East Coast figures are for all refineries in the EIA’s PADD 1 reporting region. Given that Sunoco’s Marcus Hook and Philadelphia refineries were buying lighter sweeter crudes than others, their price disadvantage was almost certainly greater.

Marcus Hook and Philadelphia may be beyond salvage. Sunoco has written off the value of both almost entirely, taking a charge of $2.2 billion against its refining business, as my colleague Robert Campbell explained in a column Tuesday.

Some observers consider their only future may be as storage terminals for the new gas and liquids plays in the north-east linked to the Marcellus and Utica shales.

Marcus Hook and Philadelphia are unlikely to be the last refiners facing sale or closure around the North Atlantic basin. Most refineries in the United Kingdom and other parts of Western Europe face an uncertain future.

In the United States, the PADD 1 Trainer and Bayway refineries owned by Conoco are under most pressure. Conoco has already indicated it intends to demerge its upstream and refining activities.

The problem for both refineries is they are almost indistinguishable from Philadelphia and Marcus Hook in terms of their reliance on expensive light sweet crudes.

Trainer was actually importing even lighter and sweeter crudes in June, and both were bringing in very expensive oil from Nigeria, Congo and Colombia, averaged down with some Angolan acid crude.

With refining margins under pressure, and light sweet oils in short supply, more refineries will have to close in the next couple of years to rebalance this segment of the market. (Editing by James Jukwey)

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