Skip to comments.Cheap natural gas gives U.S. refineries an advantage
Posted on 01/17/2013 7:42:09 AM PST by thackney
Refinery expansion projects could add as much as 9 million barrels a day to the worlds transportation fuel supply over the next five years, according to a report from Hart Energy.
That could mean competition for U.S. exports to Latin America and elsewhere.
But even if all of the expansion projects are completed and thats a big if analysts expect increased demand to absorb the new supply and provide a continuing market for U.S. products, at least for the next few years.
There are many grand announcements that are made, and then they dont come to pass, said Andrew Lipow, president of Lipow Oil Associates.
While demand for gasoline and other refinery products in the U.S. and Europe is flat, its rising elsewhere. Demand for low-sulfur diesel is growing especially quickly.
Terrence Higgins, Hart Energys executive director for refining and special projects, predicts high demand in China and India, as well as in the Middle East.
Lipow expects demand to grow in Africa, too.
Demand in the United States and Canada is expected to remain flat before eventually declining, which Higgins attributed in part to the governments higher vehicle fuel efficiency standards. The Hart analysis, Global Crude, Refining & Clean Transportation Fuels Outlook to 2035, quantifies both gasoline and diesel demand and trade flow by sulfur category.
Some to shut down
Lipow noted that as some refineries expand, others will shut down, especially smaller plants.
Thats already happening: San Antonio-based Tesoro Corp. announced last week that it will wind down operations at its Kapolei refinery in Hawaii.
Lipow said he expects more refinery closures in Australia, Japan and Europe, even as new projects come online.
Meanwhile, San Antonio-based Valero Energy Corp. is planning to build a new crude topper unit at its Houston refinery to expand its capacity to process light sweet crude oil from the Eagle Ford Shale in South Texas.
The refinery already processes 20,000 to 40,000 barrels a day of crude oil from the Eagle Ford, Valero spokesman Bill Day said, and the expansion would allow it to use more. No construction date has been set, but plans call for the work to be completed by mid-2015.
Refinery expansions are a constantly evolving target, said Roger Ihne, a principal at Deloitte. Depending on which expansions actually are built, the projects could have big implications for U.S. refiners, he said.
Mexico and other Latin American states are among the largest markets for U.S. diesel and other refined petroleum products, and Ihne said that shouldnt change in the next few years as the first major expansions to come online are likely to be in Asia and the Middle East. After that, he said it will depend on where new refineries are built.
It really is a global market, but we have a competitive advantage in the United States in supplying Latin America and perhaps Europe, he said.
U.S. refineries can produce about 17.5 million barrels of gasoline, diesel and other petroleum products a day, and Ihne said they run at about 90 percent of capacity.
Domestic demand accounts for most of that, but Ihne said without exports, refineries would operate at lower capacity and less-efficient operations might close.
Just a few years ago, the United States imported gasoline. Thats changed with higher oil production here and in Canada, and Ihne said the boom in natural gas and oil produced from shale has given U.S. refineries a cost advantage over those in other parts of the world.
Refineries use natural gas as a fuel, as well as a feedstock for producing low-sulfur diesel.
Since our natural gas is so much cheaper, we have a competitive advantage, Ihne said.
That may not last forever.
Capacity in Mexico
Higgins said expanded refinery capacity in Mexico is likely only to keep up with the growth in demand there without displacing the need for U.S. imports.
But he said planned refinery expansions in Brazil which could increase diesel refining capacity there by 1.3 million barrels a day could fill that countrys needs and even take over at least some of the rest of the Latin American market.
Ultimately, Lipow said, U.S. exports will be redirected elsewhere if that happens.
Im optimistic that the refining business in the United States is going to continue to benefit, he said.
Refineries without access to cheap Natural Gas have a huge cost disadvantage.
A few years ago NH deregulated their electricity suppliers. Several companies have sprung up in the last two years that will sell you the electric killawatt charge of your bill at a discount to the local distributor PSNH. They are doing this by buying electricity on the market from natural gas power plants that can produce it cheaper than PSNH’s coal, wood biomass,etc. plants. They originally started selling to commercial users. About a year ago they started advertising to homeowners(like me). I signed a contract for two years with a company called Resident Power.
It saves me about $15-20/ month from what I was paying PSNH.
Low Natural Gas prices gave some options including a plan that tied the electrical generation charge to the spot price of Natural Gas in the area.
During some peak consumption times, spot prices of Gas and Energy spiked. Fly by night companies that did not own generation but was buying power on a futures exchange and then couldn't cover the spike of price and high demand folded leaving customers without a contract and paying spot prices or exceeding high prices due to the timing of entering the market for a new contract.
Know who you are doing business with and read the whole contract. Even then, some companies depend on bankruptcy protection as their risk management plan.
At my former company one of their primary industrial products was building and installing NG powered turbines to make electricity connected to boilers to make steam from the exhaust heat. I was laid off because the price of NG went up so much that it was no longer economical to run them. Maybe this will reawaken that market.
There has been a significant movement from coal to natural gas for electric power generation in the last couple years.
2012 Brief: Coal prices and production in most basins down in 2012
Energy Perspectives: For most fuel sources, domestic production has been increasing
If Resident Power folds I can just go back to buying my power from Public Service of New Hampshire. It is not much of a difference.
That was the case here, small savings, until the demand/price spike. Then afterwards some saw their cost more than double.