Banner 2015 profits driven by a surprise lift in US gasoline demand have not made domestic refiners more optimistic about the future of automotive fuels.
Implied US gasoline demand last summer averaged the fourth-highest in more than 70 years of Energy Information Administration (EIA) records and the largest average seasonal volume since 2007. Record sales last year of vehicles with lower fuel efficiency could help sustain gasoline demand for a decade.
But the US EIA still projects gasoline demand to fall by more than 10pc over the next 25 years as fuel efficiency and alternative vehicles gain market share. Oil major ExxonMobil anticipates flat global demand for the fuel while distillates and jet fuel rise. And continued accords such as the climate agreement signed in Paris last year will pressure transportation fuels to cut their carbon content.
"We're in the business of refining crude oil into liquid transportation products," Philadelphia Energy Solutions chief executive Phil Rinaldi said at the IHS CeraWeek conference in Houston. "Certainly, that's a business that's in decline."
Industry executives last week emphasized broadening product slates, tapping other markets and even using different feedstocks rather than growing to meet spiking demand.
"One of the strengths of the entire refining industry is you're not seeing big capital investments to increase capacity," Marathon Petroleum chief executive Gary Heminger said at a Credit Suisse refining conference. "You're going to see more waves in earnings than you're going to see big, cyclical changes."
Marathon Petroleum's logistics partnership last year entered the natural gas liquids business and tapped a new set of customers in the chemicals manufacturing business. The company will expand its reach into non-crude production from the Marcellus and Utica shale fields, which already feed condensate to two nearby refineries.
Phillips 66 added chemicals fractionation and export access to its 247,000 b/d refinery at Sweeny, Texas. And Philadelphia Energy Solutions, operating the US Atlantic coast's largest single refinery, said it acquired the sprawling 330,000 b/d complex in 2012 with an eye beyond gasoline and diesel.
"That's because, rather than a refining and marketing focus, it was really an acquisition focused on what's going to happen next," Rinaldi said. "What happens there is a transition away from a dependence on crude to take advantage of the Marcellus resources — Marcellus and Utica."
A shift to natural gas liquids products will move Philadelphia Energy Solutions into the export business.
US Gulf coast refiners have already worked to increase access for their traditional products into Latin America, where lower refinery reliability, combined with rising demand, is creating a sustainable alternative to US markets, Valero and Marathon Petroleum said at Credit Suisse last week.
"Export capacity is soaking up a tremendous amount of the capacity in the US," Heminger said.
Other refiners have braced for a longer, leaner domestic business. Tesoro has explored alternative feedstocks as it navigates demand destruction from increased taxes and environmental policy in California, the most difficult US refining market. While the rest of the industry eyes the prospect of fading fuel demand through 2040, California has explicitly targeted slashing fossil fuel use in half by 2030.
Tesoro still sees strong and improving immediate demand in California, the largest US fuels market. The company is the state's largest refiner by capacity and supplies an expansive network of branded and unbranded retail stations. Experimental feedstocks favored by the state that can run in Tesoro's existing facilities would help the company continue to operate as peers look to leave.
"Whether we can get that done in the volumes and at the economic price point that everyone wants, and matches the regulations, that remains to be seen," executive vice president of strategy and business development Cynthia Warner said at a CeraWeek refining session.
Others may still exit entirely. ExxonMobil will plans to leave California refining this year with the sale of its 155,000 b/d Torrance refinery to PBF Energy. Alon USA, in the midst of being acquired by fellow independent refiner Delek, has halted interest in restarting its southern California refining.
BP, which left California in 2014 by selling its business to Tesoro, has shed 13 refineries in 15 years to keep only its top-profile facilities, chief executive of downstream Tufan Erginbilgic said at a CeraWeek downstream plenary.
"The refining business will continue to be a very competitive business," he said.
