Gulf Coast working to fill a fuel void in Northeast

Northeastern states are slated to lose half of their regional capacity for fuel production by midyear as financial woes push refineries there to idle, a trend likely to increase the region’s dependency on Gulf Coast supply.

A Houston-to-New York pipeline is making major expansions to accommodate growing demand to transport gasoline and other fuels up north from the Gulf Coast to fill the potential supply void.

The Gulf already supplies about half of the Northeast’s demand for petroleum products, said Mindi Farber-Deanda, head of the liquid fuels market team for the U.S. Energy Information Administration.

But the shutdown of production at two major Pennsylvania refineries last year and potential closure of a third could put the region in a precarious position and stress supplies of gasoline, jet fuel and heating oil, the agency concluded in a new report.

“It’s marginal, but it matters,” Farber-Deanda said of the drop in the Northeast’s local fuel production. “Before, you could get a certain percentage of supply from local refineries. Now you get it from Europe and the Gulf.”

The report noted that Northeastern states could experience “spot shortages with price hikes” for gasoline and other fuels as refineries discontinue operations.

Sunoco announced last month that it will idle operation of its 335,000 barrel-per-day refinery in Marcus Hook, Pa., part of the company’s plan to pull out of the refining business altogether. If Sunoco doesn’t find a buyer for its 178,000-barrel-per-day Philadelphia refinery by July, it will go off line, too, the company has said.

ConocoPhillips announced a similar move in September, taking its 185,000-barrel-per-day Trainer, Pa., refinery off line to prepare it for sale.

A combination of the sagging economy and improved fuel efficiency in vehicles and equipment has caused demand for some fuels to plateau. Meanwhile, competition from larger and more efficient refineries on the Gulf Coast and imports from Europe put pressure on local fuel producers, said Bill Day, a spokesman for San Antonio-based refiner Valero.

“They found it very difficult to compete,” he said. “If there was demand for product there, those refineries wouldn’t close down.”

Valero pulled out of the Northeast in 2010, when it sold its Delaware City, Del., and Paulsboro, N.J., refineries.

The struggling European economy has left refiners on the continent with plenty of gasoline to ship overseas.

Demand for ultra-low-sulfur heating oil is expected to rise next fall, when regulations taking effect in New York will require use of the cleaner fuel in boilers that warm buildings. A limited number of refineries are equipped to produce it.

“Heating oil concerns are probably the greatest,” said Terry Higgins, executive director of refining for consulting company Hart Energy. “A cold snap, with a strong surge on heating oil needs, could be a strain on the system.”

The Gulf Coast is replete with refineries that are expanding or have room to increase production, he said. Motiva Enterprises, a joint venture of Shell and Saudi Aramco, is nearing the end of a massive expansion of its Port Arthur refinery to increase production of ultra-low sulfur fuel and other petroleum products.

In 2010, Gulf Coast area refiners produced a net 3.4 million barrels per day of ultralow-sulfur distillate fuel oil, a category that includes the clean heating oil, according to Energy Information Administration data. That’s up from just 23,000 barrels per day in 2005.

Colonial Pipeline, a major thoroughfare for shipping fuels from Gulf Coast refineries to East Coast markets, has seen growing demand from refiners to ship larger amounts of its products north, spokesman Steve Baker said.

The 5,500-mile pipeline transports heating oil, as well as gasoline, diesel fuel and other petroleum products.

Last year, Colonial added 120,000 barrels per day of carrying capacity to its system. By mid-2012, it will have expanded the flow of distillates – including heating oil, jet fuel and diesel – by another 55,000 barrels per day. In December, the company announced it would expand its gasoline transport capacity by another 100,000 barrels per day.

In total, the expansions will increase the system’s capacity by about 8 percent, Baker said.

“We have seen a rising demand throughout the year” for fuel transport between the Gulf Coast and the Northeast, Baker said. “These are big capital investments. It’s a significant increase.”

I found a little more detail.

One of the largest projects in refi nery history was completed in May when Pine Bend’s new hydrocracker unit was brought online. This $350 million project includes the new hydrocracker, new hydrogen plant, storage tanks and expanded cooling water capacity. The project was built so that the refi nery can begin producing ultra low sulfur diesel fuel.

http://www.fhr.com/upload/PBCommmattersnl10-06.pdf
Page 2

Construction on the hydrocracker project began in May of 2004.
Here are some interesting facts from the two-year project:
• 1,600 tons of structural steel
• 22 miles of large piping
• 5,109 valves
• 4,548 gaskets
• 29,260 bolts
• 26,355 components
• 353,850 pounds of cracking catalyst
• 1.4 million work hours on fi eld construction
• Peak workforce of 780 contractors
• Two large reactors, each weighing
approximately 1.5 million pounds

Profit, as a component in a supply and demand economy, is not an issue with me. I do have a problem being raped by any collusive industry whose members produce annual reports—supposedly public documents) that are deliberately misleading.

For instance, I Googled a simple question: What is Exxon-Mobile Petroleum Refining income? I could not find an answer anywhere no matter how many ways I asked the question. Don’t pretend to be anything but a novice at reading annual reports or dealing with financial info. If that number was in the company’s annual report I could not find it.

I was able to find a summary of branded refinery cost for Dec 2011 to Jan 2012. 23 and 31 cents on the dollar, respectively. I presume costs encompass all categories of doing business—including gov’t. environmental and safety requirements. In the absense of any other info and by extension, it appears to me like the industry increased its petroleum refinery profitability over the course of that year. Realizing a net profit of better 60 cents/$ seems like a damn good business to me. To the industry’s credit it did this with existing capacity.

My problem with the oil industry and the government is they lie through their teeth. I remember interviewing a Houston-based oil company back in the 70s—about the time of the Carter debacle. One of the people in the room tried to make the argument gas should cost 5$/gal because a gal. of gas could move a 5,000 lb. car 15 miles or some such. Had nothing to do with the quaint concept of “reasonable profit”, supply/demand or any other rational barometer.

It became clear to me at the time (I interviewed most of the major oil companies) that these companies were no more American than Bic pen or Mercedes Benz. And they lie and/or mislead.

As for collusion, the evidence is at the pump. There is simply no credible way three or four different companies, headquartered, producing and shipping from around the country (let alone the globe) can consistently post the exact same price on any given day.

You seem to be a smart fella. Is there a place I can go that breaks down the refinery dollar by relevant costs and profit? I spent an hour looking and was not successful finding it.

I’m not trying to be a wiseguy. I would love to be repudiated. But it’s obvious I’ve arrived at a point where I should be better educated than I am about how the oil industry works and accounts for itself. Empirical evidence only goes so far.

Thank you in advance for a constructive reply.

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