US refineries focus on EPA compliance, delay other spending due to lower margins

Petroleum refiners in the United States and Canada are forecast to spend about $6 billion on new capital projects in 2016, said Chris Paschall, vice president of global research for the refining industry at consultancy Industrial Info Resources (IIR).

HollyFrontier's El Dorado refinery in Kansas (Image credit: HollyFrontier)

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Capex on new projects reached $5 billion in 2015. When Petrochemical Update spoke to Paschall last November, IIR was predicting $6.7 billion worth of capex on projects beginning in 2016. But he said this week that a collapse in refining margins had caused owners to tighten their budgets.

US refineries saw their wholesale gasoline margins (the difference between the wholesale price of gasoline and the price of crude-oil feedstock) fall from an average of 73 cents per gallon in July 2015 to 42 cents/gal in July 2016, according to the US Energy Information Administration. Higher gasoline inventories contributed to the falling margins.

Capital spending is expected to jump in the coming years, with IIR’s database showing $14.49 billion planned for construction kick-off in 2017 and $17.32 billion planned for 2018. Operators are planning $2 billion in spending from 2016-18, including $700 million this year, to meet the Environmental Protection Agency’s Tier 3 gasoline requirements.

The Tier 3 rule mandates that the sulfur content of gasoline must be reduced from 30 parts per million (ppm) to 10 ppm on an annual average basis by January 1, 2017 at large refineries and January 1, 2020 for about 30 small refiners and small-volume refineries. A credit and banking scheme allows larger refineries to phase in compliance over a longer timeframe.

Volatility expected to continue this year

Shrinking margins have introduced “uncertainty and sensitivity” into the refineries sector, but this will do little to stop projects that have already been approved, said Dan Morlang, Vice President of Capital Project Consulting at AP-Networks, a solutions provider for petroleum, chemical and energy companies.

“If they [the projects] have already received funding and they’re moving along, you may be able to adjust the pace, but you can’t slow them down,” Morlang said. “If you try to slow them down you may spend more money [than projected].”

Morlang said a lack of available cash would cause owners to shelve greenfield construction plans. Instead, he said, owners will look at optimizing, refitting or re-tooling existing assets, with options such as debottlenecking likely to come into favor.

Valero predicted in its second-quarter report that markets and margins will be volatile during the remainder of 2016. It expects gasoline margins to decline seasonally due to high industry-wide inventory levels and the end of the summer driving season. But it sees distillate margins improving because industry-wide inventory levels have declined.

Paschall noted that high inventories of crude oil, gasoline in storage and diesel in storage had created a “perfect storm” that was starting to hurt refinery margins. “Refiners are really trying to figure out what they can do right now,” he said. “And what they’re doing is they’re pulling back the production rates in order to try to alleviate the overproduction of gasoline and diesel at this moment.”

Refineries report on Tier 3 focus

Marathon Petroleum said in its Q2 report that 2016 capital spending on refining, retail marketing and midstream projects will be about $3 billion, compared to the $4.2 billion approved by the board at the beginning of the year. Marathon said market conditions caused the reduction. It expects to spend $600 million to $700 million between 2014 and 2021, including $200 million in 2017, on capex necessary to comply with the EPA’s Tier 3 standards.

Raymond Brooks, Senior Vice President, Refining, said in a call with analysts that maintenance expenditure has risen this year. “It was a heavy turnaround year,” he said, “but our goal in refining is what do we have to do year in, year out to level that spend as much as possible. Take care of our turnarounds, but try to keep things as constant as possible.”

Phillips66 said capital spending in the first half of 2016 was primarily for air emission-reduction projects to meet new environmental standards, refinery-upgrade projects to increase accessibility of advantaged crudes and improve product yields, improvements to the operating integrity of key processing units, and safety-related projects. Major construction activities in progress include: installation of facilities to comply with Tier 3 regulations at the Sweeny, Alliance, Bayway and Lake Charles refineries; installation of facilities to improve processing of advantaged crudes at Billings refinery; and installation of facilities to improve clean product yield at Bayway and Ponca City refineries.

HollyFrontier expects to spend $450 million to $500 million on capital projects at nine refineries in 2016, and an additional $110 million to $120 million on refinery turnarounds. A significant portion of its current capital spending is associated with compliance, particularly Tier 3. For example, at the El Dorado refinery it is working on the completion of a fluid catalytic cracking gasoline hydrotreater to meet Tier 3 requirements and a new tail gas-treating unit to provide spare capacity to the existing unit. Growth projects at El Dorado include an upgrade project to improve reformer operation, yield and reliability. A project to improve Coker yield and capacity is being evaluated.

With the completion of the Woods Cross refinery expansion and the majority of its Tier 3-related compliance soon to be behind it, HollyFrontier expects capital and turnaround spending to fall to $400 million in 2017 from $560 million in 2016, chief financial officer Douglas Aron said in a call with analysts.