Marathon Petroleum to shut two US refineries: Update

Adds detail from earnings call.

Marathon Petroleum will close about 200,000 b/d of California and Rocky Mountains refining capacity in the latest refining shutdowns hastened by a pandemic-fueled plunge in transportation demand.

The largest US independent refiner will reduce its 166,000 b/d Martinez, California, refinery to terminal operations and consider converting units to renewable diesel production. The company had no plans to restart its 27,000 b/d refinery Gallup, New Mexico, in any capacity. Both had been idled since April.

The closures will immediately support refining profitability for the remaining capacity in California, the second-largest US state for gasoline demand, and bring to nearly 100,000 b/d the volume of Rocky Mountain region capacity shut so far this year. US refining executives have warned that facilities worldwide may be operating hand-to-mouth, one major regulatory change or maintenance project away from closure.

"Our bigger view would be that we expected several million barrels to rationalize across the globe before this," Phillips 66 executive vice president of refining Bob Herman said. "The pandemic only pushes it forward, and we probably get it sooner than later."

Marathon Petroleum idled both refineries after a nearly 50pc drop of implied US gasoline demand and almost total collapse in jet fuel consumption. Refineries lost money for every barrel of oil distilled beginning in March in California, one of the first states to impose restrictions on travel and business activity to slow the spread of Covid-19. Refining margins there remained negative until mid-April.

US gasoline demand has returned from the April nadir, reaching within 10pc of year-ago consumption in the week ended 24 July. But a jet fuel recovery plateaued in July, extending a difficult outlook for US diesel stockpiles. Refiners generally blend unwanted jet fuel into the diesel supply, creating a glut that has left US Gulf coast stockpiles of ultra-low sulphur diesel (ULSD) higher by more than a third of the average inventory for the period in the previous five years.

California has for at least a decade proven one of the most difficult refining environments, despite its massive transportation fuel demand. Regulatory efforts have successfully pared back petroleum fuel demand in favor of renewable liquids and electrification, while major tech firms over the past month have extended plans to allow employees to work from home and forgo commutes.

Marathon closures

Marathon acquired both refineries in late 2018 with its acquisition of western refiner Andeavor.

Martinez was the second-largest refinery in northern California. The complex includes about 14,000 b/d of coking capacity producing a low-sulfur petroleum coke and 16,000 b/d of alkylation capacity. Marathon completed major maintenance at the refinery last year, and was moving a combined 20,000-30,000 b/d of high sulphur fuel oil to its two California refining complexes at the beginning of this year.

But the demand collapse and upcoming costly maintenance presented a turning point for the facility.

"We really hit a decision point and decided to pivot and look at renewable diesel production as opposed to refined product production," chief executive Mike Hennigan said.

Martinez was a regular importer of Ecuadorian, Colombian and Saudi crude over the past two years, according to the Energy Information Administration. The refinery had averaged about 45,000 b/d of Ecuadorian imports and 15,000 b/d of Saudi imports in the first four months of this year.

Gallup was a small, Rocky Mountain supplier drawing from local production in the Four Corners area near the New Mexico and Colorado border. The refinery produced gasoline, diesel, heavy fuel oil and propane. Marathon Petroleum unsuccessfully sought a buyer for the facility. It will keep using logistics assets at the site.

"We had a unique niche in the marketplace there that has essentially been competed away over time," Hennigan said. "It is much more difficult for a small refinery to be successful."

Braced for more

Planned or executed North American refinery shutdowns have now surpassed 800,000 b/d this year. A bankruptcy proceeding closed with Philadelphia Energy Solutions' 330,000 b/d of Philadelphia, Pennsylvania, refining capacity permanently closed to convert the site to other industrial uses. HollyFrontier said in June that it would largely shut its 52,000 b/d refinery in Cheyenne, Colorado, and convert some hydrotreating capacity to produce renewable diesel. Both refineries struggled well before the Covid-19 pandemic.

Calcasieu Refining confirmed late last week that it would idle its 136,000 b/d refinery in Calcasieu, Louisiana, through at least August. North Atlantic Refining idled its 115,000 b/d Come-By-Chance, Newfoundland and Labrador refinery, later purchased by privately-held Irving Oil.

US refining executives expect more to follow worldwide. The pandemic has left facilities just able to sustain operations more vulnerable to costly, unexpected outages or major investments to comply with new regulatory requirements.

"It is when a refinery has an outlook based on a configuration or fundamentals that makes it negative to begin with and then there is a large cash outflow due to something changing — that is generally what gets these refineries," Valero chief operating officer Lane Riggs said of the broader refining industry.

US refiners have still demonstrated stronger margins than Asian or European competitors, PBF Energy chief executive Tom Nimbley said.

"Unfortunately, it just means that we are losing less money than other parts of the globe," Nimbley said. "But the refining kit in the United States is still advantaged."

By Elliott Blackburn