US refiners are operating at the highest operating rate since before the pandemic, but they are not expected to bring relief to the tight fuel market through major capacity expansions in the short term.
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 350kbpd
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 369kbpd refinery in Beaumont, Texas. The
project will add another 250kbpd crude distillation unit to the facility by
next year in conjunction with the company's plan to increase oil production
from Texas' Permian basin.
The largest US refiner Marathon
Petroleum continues work on the South Texas Asset Repositioning (STAR) project
at its 593kbpd 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 US$1.5bn STAR project, first announced in
2015, is intended to add 40kbpd of new crude capacity and expand the facility's
residual oil processing capabilities when complete next year.
Valero Energy is steering its own
expansion project in Texas, with plans to start-up a 55kbpd delayed coker and
sulphur recovery unit from the first half of next year at its 395kbpd Port Arthur
refinery. The project will increase the facility's heavy-sour crude oil and
residual processing capacity.
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 2022 roughly 1.0Mbpd in US refining capacity was shuttered due to
shattered demand.

War Reframes Outlook
Recent events have reframed those
assumptions. Impacts from the war in Ukraine have complicated trade in a number
of commodities in early 2022, and refined product stocks in the US and Europe
dwindled following sanctions on Russian energy.
Refining margins responded by
reaching rarefied air, US Gulf coast refining margins in May 2022 averaged
more than double year-ago levels. European gasoline margins reached a
record high US$21/bbl premium to Brent in 2022.
Northwest
European gasoline refining margins have inched up in early March 2023 to around
US$14/bbl as stockpiles across the Atlantic fell against the backdrop of weak
exports to the US and ample inventories. Asia-Pacific gasoline
margins pushed past US$30/bbl for the first time last year. There is
not much slack in the US refining system to answer the call offered by these
prices.
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 13Mbpd this 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 208kbpd of
renewable diesel (RD) processing capacity by 2024. Valero, Marathon, Phillips
66, PBF Energy, and HF Sinclair have recently outlined around US$5Bn in such
investments, with renewable fuel projects absorbing the bulk of a few
companies' capex plans.
Phillips 66, which made a final investment decision last year to move forward with
the US$850m Rodeo
Renewed project to convert its San Francisco Refinery in Rodeo, California,
into one of the world’s largest renewable fuels facilities, has earmarked around 45% 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 50% of its US$1.3B capital outlay for this year for converting
the shuttered Martinez refinery near San Francisco into a 48kbpd RD plant by
year end.
In a possible sign of this trend's
long-term staying power, service companies specialising 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, advised 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.
Pushing Back 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 2023 summer peak demand driving season.
Phillips 66, which at the start of
2022 indicated that it would soon undertake turnarounds pushed off during
the pandemic, stated that it will now spend less money on maintenance than
previously forecast as more turnarounds are delayed until this year.
This practice is not without its
risks, as some refiners have suggested that high utilisation rates are
unsustainable at current levels.
According to Valero Energy, historically refineries have been able to
hit 93% utilisation but generally this cannot sustain it for long periods of
time.
Running Near Full Tilt
US oil refiners ran their plants
at near or above 90% of capacity in Q4 2022, as tight fuel supplies spur high
profits and operating rates. The refining industry continues to mint huge
profits on buoyant demand for gasoline, diesel, and jet fuel. In Q1 2023 refiners
expect to lower capacity operating due to a heavy maintenance season.
Marathon Petroleum Corp operated
its system at about 88% of combined oil processing capacity, a cooler pace compared
to 94% in Q4 2022 as it completes maintenance work at some plants. Phillips 66’s
crude utilisation was 91% in Q4 2022, but it expects Q1 2023 capacity
utilisation to be in the mid-80%.
Shuttered Plant Won’t Restart
In October 2022, US energy
executives told US Energy Secretary Granholm that shuttered crude oil
refineries won’t restart. Limited US
refinery capacity, and perhaps more critically, refinery capacity in specific
US geographic areas, known as PADD’s, has spared worry in the US over high
gasoline prices and energy security.
Shuttered refineries unlikely to
start back up are possibly the latest nail in the US refinery coffin. In June
2022, Chevron posited that there would never be another new
refinery built in the US. According to Chevron, building a refinery is a
multi-billion-dollar investment. It may take a decade. A refinery has not been
built in the US since the 1970s.
Oil and gas companies now must
weigh the benefits of committing capital ten years out that will need decades
to offer a return to shareholders in a policy environment where governments
around the world are saying ‘we don’t want these products to be used in the
future.”