November 25, 2009 / 12:41 AM / 8 years ago

U.S. oil refinery profit elusive; more closures seen

NEW YORK (Reuters) - More plant closures could be on the way for the U.S. oil refining industry, which has already idled some plants this year, as profits are squeezed by weak fuel demand and brimming supplies.

“We believe that the U.S. refining industry will only return to decent levels of profitability after the permanent removal of at least 5 percent of its capacity, or around 900,000 bpd. That figure may take a couple of years to achieve,” said Mark Flannery, analyst with Credit Suisse.

For the industry to cut 5 percent of production, Valero Energy Corp’s (VLO.N) closure of its Delaware City, Delaware, refinery, announced on Friday, will not be the last plant to shut down in regions like the East Coast and Gulf Coast.

Valero, the country’s largest independent refiner, said the 210,000-barrel-per-day Delaware City plant was losing $1 million a day in the industry downturn, forcing its hand.

The region looks particularly susceptible to more closures.

“This is mildly positive news for other East Coast refiners -- Sunoco (SUN.N), ConocoPhillips (COP.N), Western (Refining Inc WNR.N) -- but the real issue remains terrible demand and high import exposure. One more major East Coast refinery needs to shut, in our view,” Deutsche Bank analyst Paul Sankey said in a note.

East Coast refineries face stiff competition from export-focused players like India’s Reliance Industries (RELI.BO), as well as new capacity that is expected to come online in the Middle East, said Mark Routt, analyst at KCB in Houston.

U.S. Gulf Coast refineries, especially smaller, less-efficient ones, are also likely candidates for closure due to the premium added by the cost of shipping fuel.

“If you’re an export market like the Gulf Coast, you’ve got a debit to your margin associated with the incremental cost of having to move product into wherever it’s principally sold,” Mark Gilman, analyst with Benchmark Co, said.

Older plants that have been owned by numerous companies could also be vulnerable.

“When you have multiple owners over a period of time, you tend to get a under-maintained, under-invested, cobbled together, jerry-rigged kind of unit,” Gilman said.

Already, several refiners have buckled under the financial pressure of poor margins and cut production rates and temporarily mothballed or indefinitely shut some plants.

    But some refineries may be protected by their location in niche markets.

    Some Midwest plants, for instance, operate in markets relatively secluded from import infrastructure. These face little competition from other refiners because the high cost of transporting fuel over long distances by truck can overshadow a plant’s inefficiencies.

    Similarly, West Coast refineries are less vulnerable because they cater to a relatively isolated market with specific fuel grade needs, analysts said.

    Refiners may be hoping others will fold first.

    “It’s kind of like a poker game ... you really don’t want to be the guy that’s going to be closing units for the benefit of the remaining additional players in a particular market. What you’re hoping is that somebody else is going to do it,” Gilman said.

    Plant closures are likely to take place over an extended period as refiners attempt to gauge how much capacity might be taken offline by competitors.

    U.S. refiners may get some relief from Europe, where several refineries have been shut for economic reasons, and where analysts say more closures may occur.

    Editing by Jeffrey Jones and David Gregorio

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