Pandemic shrinks US refining capacity

US refiners are consolidating cash to weather a demand collapse battering their weakest plants — and to leap on deals to propel their business in a recovery.

More than 500,000 b/d of US refining capacity has been idled in the wake of the Covid-19-driven plunge in fuel demand, and over half of that will close for good. Along with this year's formal demise of the largest US Atlantic coast refinery — Philadelphia Energy Solutions' 330,000 b/d facility — nearly 5pc of crude distillation capacity in the world's largest refining country could shut in 2020.

But US refining executives are not yet ready to declare this year's forced embrace of telecommuting, remote learning and no-table restaurants a fundamental change for their industry. Implied US fuel consumption has climbed to within 10pc of year-earlier demand, according to EIA estimates. "I think if you look at this country and the way they want to live, it is not the way they have lived over the last quarter," Valero chief executive Joe Gorder says. "We just need to not get hung up and think we are going to be in this dungeon we are in now, forever."

The demand drop has hastened shutdowns for refineries already teetering on the edge of closure. Months of poor returns have drained cash, leaving some facilities with higher operating costs unable to justify the spending needed for maintenance or to recover from accidents. "Our bigger view would be that we expected several million barrels to rationalise across the globe before this," Phillips 66 executive vice-president of refining Bob Herman says. "The pandemic only pushes it forward, and we probably get to it sooner than later."

Refiners have consolidated cash and secured credit to ride out the plunge. Marathon Petroleum, Valero, Phillips 66 and PBF Energy quickly added $10bn in liquidity in April. And Marathon last month signed a $21bn agreement to sell its Speedway retail business with Japan's Seven & I, owner of the 7-Eleven retail chain. The sale process began last year but was delayed by the pandemic. Marathon expects the deal to help it reduce debt and pay back shareholders.

PBF and CVR Energy have suspended dividends, and US Gulf coast refiner Delek says it may decide to do the same. But in the second quarter, Delek's retail and midstream earnings compensated for its refining losses. "We did not see a reason to punish our shareholders over weakness in refining," chief executive Ezra Uzi Yemin says. "Obviously, if that weakness in refining continues we will look at that, especially in light of other opportunities that exist in the marketplace."

Margin orders

One refiner's rainy day fund is another's war chest. Renewable diesel projects still dominate US refiners' investment plans. But market pressure will force North American refining consolidation. Oil major Shell continues to pursue the sale of 465,000 b/d of US Gulf and west coast capacity. In Canada, Irving Oil bought the 115,000 b/d Come-by-Chance refinery after the demand drop idled the facility.

Delek is seeking to separate from a close association with once-lucrative discounts on west Texas crude. CVR, which has acquired 15pc of Delek through stock purchases since February, now considers the Rocky Mountains a better fit for its Oklahoma and Kansas refining system, chief executive David Lamp says.

Marathon did not market its 166,000 b/d refinery in Martinez, California, before choosing to convert it into a terminal and potential renewable diesel plant. It unsuccessfully sought a buyer for the tiny 27,000 b/d Gallup, New Mexico plant before choosing to "indefinitely idle" it. HollyFrontier explored a sale of its 52,000 b/d refinery in Cheyenne, Wyoming, before determining that it would be worth more as a renewable diesel plant. Quarantine will shrink US refining capacity no matter what the future holds for demand.

By Elliott Blackburn