US refiners invest sparingly in new capacity

US refiners are executing a few capital projects that will expand domestic crude processing capacity before the end of 2023, but expensive forays into renewable fuel production will likely limit capacity expansions in future turnarounds.

Three of the largest refiners in the US are currently working on capital projects that could offer another 350,000 b/d of crude processing capacity to the US refining portfolio by the end of next year, partially offsetting the effect of recent closures around the industry.

The largest refinery expansion currently underway in the US is ExxonMobil's BLADE (Beaumont Light Atmospheric Distillation Expansion) project at its 369,000 b/d refinery in Beaumont, Texas. The project will add another 250,000 b/d crude distillation unit to the facility by next year in conjunction with the company's plan to increase oil production from Texas' Permian basin.

Valero is steering its own expansion project in Texas, with plans to start-up a 55,000 b/d delayed coker and sulfur recovery unit from the first half of next year at its 395,000 b/d Port Arthur refinery. The project will increase the facility's heavy-sour crude oil and residual processing capacity.

Marathon Petroleum continues work on the South Texas Asset Repositioning (STAR) project at its 593,000 b/d Galveston Bay refinery in Texas, which is integrating the Texas City refinery it purchased from BP in 2012 with another refinery in the same city the company already owns. The $1.5bn STAR project, first announced in 2015, is intended to add 40,000 b/d of new crude capacity and expand the facility's residual oil processing capabilities when complete next year.

These projects, all announced prior to 2019 and delayed repeatedly by Covid-19-related restrictions, have taken on new importance in view of stressed US refining capacity. US refiners have invested relatively lightly in capacity expansions during turnarounds in recent years, with a dimming long-term outlook for road fuel demand running headlong into the short-term demand shocks provided by the pandemic. Across 2020 and 2021 roughly 1.5mn b/d in US refining capacity was shuttered due to shattered demand, and it seemed likely to many industry watchers that less — and not more — refining capacity was needed in the short-term.

War changes the outlook

Recent events have reframed those assumptions. Impacts from the war in Ukraine have complicated trade in a number of commodities in recent months, and refined product stocks in the US and Europe have dwindled following sanctions on Russian energy. Refining margins have responded by reaching rarefied air — US Gulf coast refining margins in the four-week period ending 20 May averaged more than double year-ago levels, European gasoline margins in April reached a record-high $21.44/bl premium to Ice Brent and Asia-Pacific gasoline margins pushed past $30/bl for the first time earlier this month.

There is not much slack in the US refining system to answer the call offered by these prices. The Energy Information Administration estimates that US crude utilization will average 93pc in the second quarter before increasing to 94pc in the third quarter — a mark that would represent the highest rate in four years.

Recent events may signal that more crude processing is needed in the US and elsewhere, especially with US crude production expected to hit a record-high of close to 13mn b/d next year. But new refinery expansion projects are unlikely in the short-term, with companies already managing cost-intensive projects to set up renewable fuel infrastructure at a few facilities.

US petroleum refiners are currently involved in projects that promise to bring on roughly 208,000 b/d of renewable diesel (RD) processing capacity between this year and 2024. Valero, Marathon, Phillips 66, PBF Energy, and HF Sinclair have recently outlined around $5bn in such investments, with renewable fuel projects absorbing the bulk of a few companies' capex plans.

Phillips 66, which is without a partnerin its $850mn conversion of the San Francisco refinery in California, has earmarked around 45pc of all growth spending this year for its RD project as part of what it has called a "very constrained" capital approach. Marathon Petroleum has similarly earmarked around 50pc of its $1.3bn capital outlay for 2022 for converting the shuttered Martinez refinery near San Francisco into a 48,000 b/d RD plant by 2023.

In a possible sign of this trend's long-term staying power, service companies specializing in refinery turnarounds have heralded this shift toward RD production as a new bread-and-butter business line. Matrix Service, which does major maintenance projects for refiners, utilities and other industries, said late last year that refining sector investments are "moving toward carbon reduction and renewable fuels conversions" that will represent a significant portion of its business moving forward.

Delaying maintenance

Rather than investing in capacity expansions, refiners will walk the razor's edge by pushing back turnarounds to keep feedstocks — and cash — flowing this summer driving season. Phillips 66, which at the start of the year indicated that it would soon undertake turnarounds pushed off during the pandemic, said last month that it will now spend less money on maintenance this year than previously forecast as more turnarounds are delayed until next year.

This practice is not without its risks, as some refiners have suggested that utilization rates are unsustainable at current levels.

"Historically although we've been able to hit 93pc utilization generally you cannot sustain it for long periods of time," Valero chief executive Joe Gorder said on 26 April. "I think the markets will have to balance more on the demand side."

By Dylan Chase