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.”