Replies

Generally I agree with you and if you're a regular reader here at FR you know that I'm a staunch supporter of the free enterprise system. But there is one executive in the refining industry who has said a couple of times: "no new refineries will be built in the US in this decade." I find that statement just a little suspicious. Why is that guy so sure that no new refineries will be built? Meanwhile, there's a company that has obtained the environmental permits to build a new refinery near Yuma and yet they can't find investors to finance the project. There's an issue with securing oil supplies for the new refinery for the long term, and I don't know anything about the expected ROI on the new refinery. So I don't know if there's anything unusual about the lack of investor interest so far.

There's no question that oil production is an extremely fragemented and competitive world industry with hundreds of producers, and no company has enough market share to manipulate the price of oil. But the refining industry is more concentrated, with about 15-20 refiners operating in the US. It's essential for fair competition that the current refiners don't do anything to interfere with the construction of new refineries. I'm going to be following the news on this Yuma refinery closely to see if the company finds investors and if not why not. That's a good location for a refinery and I can't think of a good reason why it shouldn't be built.

So I don't know if there's anything unusual about the lack of investor interest so far.

I do not know about the lack of invester's in the Yuma project, but I do know that there are two other projects in process, which I believe may be related to Yuma.

The first is a pipeline project which runs from Texas Gulf region through Yuma to Los Angeles. This project is to carry gasoline. The second is a ship unloading terminal in Wilmington, which is to ship crude from Wilmington to ??

Both of these projects are in phase II engineering and are approaching procurement. It is possible that w/o thses projects Yuma does not have a inlet for the required crude nor an outlet for finished product.

Let's get a couple of things straight. You don't invest your capital without the assumption or expectation of a positive return, and preferably a nice one, right? Fine. Me, too.

And oil/refining companies are no different.

Refining has been for decade -- up until about 2 yrs ago, as a matter of fact -- an absolutely rotten business proposition. 2-3% historical net margins? You and I wouldn't look at such a proposition for a moment, now would we? And these are on refineries already built.

Now, consider. To build a refinery, ground-up, today, a company must do all the ordinary things: gather capital, acquire property, draw up construction plans and have them approved by sundry agencies, set up contracting arrangements.

THEN comes the fun part. From well before construction begins right through to the date that operations commence, the company must endure any number of shotgun lawsuits over anything, any subject at all, that the envirowhacko socialists can get any judge to listen to. Then, postulating the company's success in court, the company will get to go through unending appeals. The environazi crowd understand the cost of capital perfectly well; they don't need to win, really, just to be able to guarantee an indeterminate delay into the future. And the legal 'system' is all too willing to accommodate them in this.

I won't even go into the problems the envirowhackos can and do cause energy companies after a new facility begins operation.

All around, it's a lousy deal, and it is in no way surprising that one or another exec said that there won't be any new refineries built (in the US) in the next decade. I'd be perfectly willing to wager that, absent a sea change in public consciousness -- not knowledge; first one must be conscious before one can acquire knowledge -- regarding the energy industry, there won't be a new refinery built in the remainder of my life, which I fancy will be considerably longer than a decade. Nothing conspiratorial in this at all, merely undiluted practicality.

If the Yuma project lacks for investors, this too is hardly surprising. Relative to any number of other investments one might consider throwing a billion-plus dollars into, a refinery simply stinks -- no pun intended.