More Refineries or New Refineries, When and How?
by Rob Kirby, Kirby Analytics. February 26, 2007
Oil, the stuff that cures the squeaky wheel - seems like the world can never get enough of the stuff. Furthermore, everyone seems to have their own spin on it. Take, for instance, this Frank O'Donnell piece published in June of 2006:
"It's tempting to not to let the facts get in the way of a good story, but even the oil industry itself admits this issue is a red herring. For example, the National Petrochemical and Refiners Association conceded at a May 23 Senate hearing on price gouging that gasoline supplies were temporarily tight. But the oil industry lobby went on to note that:
This situation will ultimately be addressed through announced additions to U.S. refinery capacity, estimated at 1.4 to 2.0 million barrels per day. This is an 8-11percent increase in U.S. capacity, which should be in place by 2010 at the latest. Over the past 10 years, domestic refining has increased by an average of 177,000 barrels per day of production each year or the equivalent of building one new, larger than average refinery each year. This fact should assuage some concerns about the fact that no new grassroots refinery has been built in the U.S. in over 30 years.
Indeed, at a Senate hearing last year, BP's chief executive officer explained that [refinery] margins over the last 10 to 15 years have not been high enough on average to justify building a new refinery. And in a recent closed-door briefing with congressional aides, an Exxon Mobil official said that company foresees no need to build new refineries at least through the year 2030."
While Frank O'Donnell just happens to be the president of Clean Air Watch, self described as being a non-partisan / non-profit organization - let's look at some of the hard data contained within -- namely, the claim that domestic refining has increased 177,000 barrels per day, per year - over the past 10 years.
Specifically, the article above contends that existing refining capacity is increasing - incrementally - annually.
Sure enough, when we take a cursory peak of EIA/Gov't refinery output data [dates don't conform perfectly], we can readily see that this position is consistent with the notion that output has been steadily, incrementally increasing:
Petroleum Products: U.S. Refinery Output, Trade, and Supply, 1990-2001
(millions of barrels per day)
|Year||Refinery Output||Net Imports||Stock Changes|
The article goes on to make the assertion, citing un-named oil executives, that due to "poor margins" - there is little need to build new refineries until, perhaps, 2030.
I read this and I thought, WOW!
But let's first take a look at some expanded EIA data:
If you take a look at the graph above, you will notice that the U.S. Crude Refining Capacity Utilization Rate has grown steadily - from around 80 % in the late 1980's � to today's run rates in excess of 90%. So it’s been more a case of higher Capacity Utilization lending to increased output than increased Capacity to Produce. Furthermore, Crude Refining Capacity is LESS today than it was in 1981.
There is a HUGE difference between increasing Capacity Utilization [operating rate] and adding Production Capacity.
Amazing, isn't it, how a fuller, more robust data set presents a much different story?
Now I'd like everyone to consider this more recent development, reported just this past weekend:
Launch of First Fully Integrated Refining, Petrochemicals and Fuels Marketing Joint Venture Projects with Foreign Participation in China
Sunday February 25, 7:35 am ET
Contract Signing By Sinopec, Fujian Province, ExxonMobil and Saudi Aramco Marks Start of a World Class Project to Meet China's Rapidly Growing Demand for Petroleum and Petrochemicals
Take special note of WHO the players are -- namely, Saudi Aramco, Sinopec and ExxonMobil. Now, I'd like you all to consider the notion that,
"The Fujian Refining and Ethylene Joint Venture Project, located in Quanzhou, Fujian Province, will expand the existing refinery from 80,000 barrels-per-day (4 million tons-per-year) to 240,000 barrels-per-day (12 million tons-per-year). The upgraded refinery will primarily refine and process sour Arabian crude."
Reading between the lines, since this project involves the Chinese, the Saudis and sour Arabian crude, I'm making special note that this project involving the Saudis is a 3-fold upgrade for SOUR CRUDE - not the SWEET STUFF that Saudi Arabia is so well known for.
Historically, SWEET CRUDE comes from oil fields like the world's largest - Ghawar, in Saudi Arabia and other "sweet giants" like Burgan in Kuwait, Cantarell in Mexico and Daqing in China. Evidence indicates that these oil fields are now all in decline. This latest announcement involving the Saudis, Chinese and American multi-national ExxonMobil – involving sour crude - is consistent with a declining global supply of light sweet crude.
While one project clearly does not establish a trend, it’s consistent with Hubbert's Peak Oil Thesis and it raises these questions:
- Can the Saudis increase output to meet growing world demand as they so often claim?
- What is the true state of remaining Reserves in the Ghawar oil field?
- Should the U.S. be building or converting existing refining capacity to process greater amounts of sour crude?
Reality dictates that availability of sweet crude stocks are in serious doubt. In this light, new refineries capable of handling sour crude cannot wait until 2030 � they are needed now, today.
Overseas equities began the week on positive note with Japan's Nikkei Index adding 26 points to close at 18,215. North American equities didn't fare as well with the DOW losing 15.22 to 12,632.26, the NASDAQ off 10.58 to 2,504.52 and the S & P losing 1.85 to 1,449.35. NYMEX crude oil futures added .37 to close at 61.51.
Interest rates eased about 5 basis points across the curve with the 10-year bond finishing at 4.63%, the 5-year bond at 4.62% and the 2-year maturity ending the day at 4.76%.
On foreign exchange markets the U.S. Dollar Index gave up .15 to end the day at 83.84.
Precious metals ended the day higher with COMEX gold futures gaining 2.90 to 687.30 while COMEX silver futures added .16 to 14.75. The XAU gained 1.83 to 147.65 and the HUI added 4.53 to 361.82.
On tap for tomorrow at 8:30 a.m. Jan. Durable Goods Orders data is due - expected -3.0 % vs. prior +2.9 %. At 10:00 a.m. Feb. Consumer Confidence data is due - expected 109.5 vs. prior 110.3. Also at 10:00 a.m. Jan. Existing Home Sales data is due - expected 6.30M vs. prior 6.22M.
Wishing you all a happy evening and pleasant as well as prosperous week!
© 2007 Rob Kirby