June 7, 2007 / 1:14 AM / 12 years ago

American refiners reluctant to invest

NEW YORK (Reuters) - Oil companies are reluctant to spend money to boost North American fuel production capacity, fearful that demand could slump under the weight of record gasoline prices, executives and analysts said at the Reuters Energy Summit in New York and Washington this week.

Smoke rises from stacks as processing slowly resumes at the Imperial Oil refinery in Nanticoke, February 28, 2007. Oil companies are reluctant to spend money to boost North American fuel production capacity, fearful that demand could slump under the weight of record gasoline prices, executives and analysts said at the Reuters Energy Summit in New York and Washington this week. REUTERS/J.P. Moczulski (CANADA)

The situation, along with growing fears that fuel producers are unable to smoothly run their plants due to tougher environmental standards, signals that the continent may have to get used to high pump prices and rely increasingly on fuel shipments from abroad.

“It is almost self-fulling. If you’re a refiner, you’re reluctant to add capacity,” said Ron Brenneman, chief executive of Petro-Canada PCA.TO, which runs two refineries in Canada. “By not adding capacity, you’re keeping the market fairly tight.”

Oil companies have not built a new refinery in the United States in about 30 years due to high costs and uncertain returns, and projects to boost production from existing plants have lagged demand growth. The last refinery built in Canada was in 1984.

The Bush administration has been trying to reduce U.S. dependence on oil shipments from the Middle East to shore up national security and has sought to encourage refiners to build new domestic plants.

But in the past year, energy companies, raking in record profits, have cut U.S. refinery growth plans by one-third, Guy Caruso, head of the U.S. Energy Information Administration (EIA), told the summit on Monday.

“They’re saying, ‘We maybe have to think twice about the pace of expansion, if indeed we’re not sure the demand for the refined products is going to be there,’” Caruso said.

The industry has been discouraged by a push in the United States to slash gasoline use by producing domestic renewable fuels like ethanol, as well as rising costs for raw materials like steel and a tight labor market.

“We’re not building refineries in the U.S. for economic reasons,” said Jeff Morris, CEO of independent refiner Alon USA Energy Inc. ALJ.N.

“What’s wrong with having the 500,000 barrel per day export refinery in Saudi Arabia selling gasoline to the United States? The only thing I see fundamentally wrong is the security issue. That is beyond the scope of a refiner,” he said.

REFINERY BREAKDOWNS

A prolonged series of refinery problems since winter has raised concern that the industry is struggling to keep gasoline production at full throttle because of stringent environmental standards for fuel.

U.S. refineries ran at 89.6 percent capacity last week, the lowest level for this time of year in 15 years, according to a government report Wednesday. Slow production since February has deeply cut stockpile levels of gasoline.

“Clearly, the refiners are trying, but this is becoming frightening,” said Peter Beutel, president of oil consultancy Cameron Hanover. “Gasoline and heating oil prices are already killing consumers.”

In the meantime, imports of gasoline have surged to near record highs, helping to fill the gap. U.S. gasoline consumption is nearly 9.5 million barrels per day, with imports last week making up 1.5 million bpd.

Experts said federal regulations requiring low sulfur fuels have made refineries increasingly complex, meaning small operating glitches could take out larger swaths of production.

They added that a great deal of industry caution in the wake of a deadly explosion at BP Plc’s (BP.L) (BP.N) Texas City refinery in 2005 may also be slowing the speed of unit restarts.

“The complexity of these refineries has increased over time,” said Petro-Canada’s Brenneman. “The more stuff you integrate into an existing facility, the more complex it gets, and the more exposure you have to one problem rippling through a refinery.”

The EIA’s Caruso said he expects U.S. refiners to recover, with an average utilization rate of around 92 percent of capacity over the summer, but others disagreed.

“Its surprising to me that we haven’t been able to get back to the five-year average utilization rate,” said Alon’s Morris. “We seem to be hung up around the 88 to 89 percent range.”

“I think we’re learning what the real long-term sustainable utilization of our system is,” he said.

(For more on the Reuters Global Energy Summit, see <ID:nSP307799>)

(For summit blog: summitnotebook.reuters.com/)

Reporting by Richard Valdmanis, additional reporting by Jeff Jones, Janet McGurty, Michael Erman, Robert Campbell, Matt Daily and Ed Tobin in New York, Tom Doggett and Chris Baltimore in Washington, editing by J.S. Benkoe

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