US refiners seek lower capacity for longer

US independent refiners are deepening their capacity cuts and seeking more sectoral consolidation to match an extended downturn in global fuel demand.

A resumption of Covid-19 lockdowns in Europe and flattening growth in US transportation fuel demand has led US refiners to cut dividends and operations in order to get through the winter. Executives estimate that roughly half of the 2mn-2.5mn b/d of US refining capacity made redundant in the immediate demand outlook has been idled or is planned to shut.

"Whether it is the west coast or whether it is worldwide, the industry is under a lot of stress right now and the way cyclical industries get out of that stress is rationalisation," Marathon Petroleum chief executive Mike Hennigan says. US capacity on the highest-cost west and east coasts is among the first to close.

PBF Energy's plan to shut roughly 85,000 b/d of capacity at still-operating Atlantic coast refineries this year brings the volume of US capacity shuttered in 2020 to 660,000 b/d (see table). A further 140,000 b/d will shut over the next three years, as part of planned renewable diesel conversion projects.

But the US Gulf coast — a powerhouse of crude access, low energy costs and ample labour — could also trim its processing capacity this year. LyondellBasell took a $582mn impairment on its complex 268,000 b/d refinery in Houston, Texas, because of its reduced profitability outlook, taking its value to $560mn. A total of 821,000 b/d of the plants idled so far are advertised as temporary closures. Louisiana alone has more than 700,000 b/d of crude refining capacity awaiting the return of stronger margins. But delayed maintenance could prove the breaking point for some facilities — lengthy deferrals increase risks and costs, and could ultimately shutter capacity.

"I think we will see rationalisation in the Gulf coast," PBF chief executive Tom Nimbley says. "There are a lot of small refineries."

Marathon denies having any plans to part with its US Gulf coast assets — in addition to 1.1mn b/d of highly complex coastal capacity, it operates a Permian-fed 131,000 b/drefinery in El Paso, Texas. But the US' largest independent refiner is scrutinsing marginal facilities across a system sprawling from the Gulf coast through the midcontinent and Rocky Mountains to the west coast, after shutting its California and New Mexico refineries earlier this year. "Our goal is to make sure that we have a competitive set of assets that can manage through any type of tough environment like we are experiencing today," Hennigan says.

Dividend divide

Scale appears to be driving divergent dividend strategies, as smaller firm Delek this month opted to suspend its dividend, following similar decisions by CVR Energy and PBF. The three largest refiners — Marathon, Phillips 66 and Valero — expect capital expenditure (capex) cuts and other cost controls to preserve dividends as long as the market does not significantly worsen. "One of the things I have learned is you never say never in this business," Phillips 66 chief executive Greg Garland says. "But all the actions that we have taken to date, cutting our costs… our capex, increasing our liquidity, have been around defending the dividend."

Asset disposal plans may present a buyer's market for those with the financial resources. Shell is exiting 450,000 b/d of North American capacity — including the 240,000 b/d plant in Convent, Louisiana, which it will shut this month — to reduce its refining footprint. CVR, which bought an almost 15pc stake in Delek this year, has its eye on refining and retail in the niche Rocky Mountains market. "The more consolidation that happens, the more efficient the fleet is, and we would like to participate in that," CVR chief executive David Lamp says.

By Elliott Blackburn