Gasoline refinery expansions scaled back

By H. JOSEF HEBERT, Associated Press Writer 1 hour, 15 minutes ago

WASHINGTON - With Congress and the White House pushing to increases the use of ethanol, the oil industry is scaling back its plans to expand refineries — which could keep gasoline prices high, possibly for years to come.

President Bush has called for a 20 percent decline in gasoline use by 2017 and the Senate is debating legislation for huge increases in the use of ethanol as a motor fuel. So, oil companies see a growing uncertainty about future gasoline demand and less need to increase refinery capacity to make more gasoline.

A shortage of refineries frequently has been blamed by politicians for the sharp price spikes in gasoline.

This spring, refiners, hampered by outages, could not keep up with demand and imports were down because of greater fuel demand in Europe and elsewhere. Despite stable — even sometimes declining — oil prices, gasoline prices soared to record levels and remain well above $3 a gallon.

Consumer advocates maintain the oil industry likes it that way.

"By creating a situation of extremely tight supply, the oil companies gain control over price at the wholesale level," says Mark Cooper of the Consumer Federation of America. He argues the refining industry "has no interest in creating spare (refining) capacity."

Only last year, the Energy Department was told that refiners, reaping big profits and anticipating growing demand, were looking at boosting their refining capacity by 1.6 million barrels a day, a roughly 10 percent increase.

But oil companies already have scaled those expansion plans back by nearly 40 percent. More cancelations are expected if Congress passes legislation now before the Sensate calling for 15 billion gallons of ethanol use by 2015 and more than double that by 2022, say industry and government officials.

"These (expansion) decisions are being revisited in boardrooms across the refining sector," says Charlie Drevna, executive vice president of the National Petrochemical and Refiners Association.

Why no one's making more gas

Refineries are making money like never before, so why aren't more people getting in on the action?

By Steve Hargreaves, CNNMoney.com staff writer

June 5 2007: 5:25 PM EDT

NEW YORK (CNNMoney.com) -- Motorists must get tired of hearing how refinery problems are causing high gasoline prices.

In a free-market economy, if there really was such a shortage (most experts say there is), and refining profits are so high (any oil company earnings report will attest they are), then why aren't people building more refineries?

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The oil industry has long said refineries are too expensive, too hard to get a permit for, aren't necessarily needed when the government is calling for a reduction in gasoline use, and take so long to build that gasoline prices could collapse by the time one comes online. Instead, they are boosting output through expansions at existing refineries.

Consumers don't necessarily buy this, instead thinking the industry is in cahoots to restrict supply and reap massive profits.

But it's not like oil companies are the only ones who could build refineries. After all, the technology isn't particularly complex. And with everyone from investment banks to insurance companies to private equity firms, chasing high returns in an era of low global interest rates, there's a ton of cash out there just looking for a place to go.

So why hasn't anyone plunked it down to make more gas?

Money to be made

The refinery shortage, cited by experts as a main culprit behind the recent record high gasoline prices of over $3 a gallon, has been a windfall for the oil industry.

Exxon Mobil (Charts, Fortune 500) made nearly $2 billion profit in worldwide "downstream operations," which include refining, in the first three months of 2007 alone.

The difference between what refiners pay for a barrel of oil and how much they can sell the products for, known in the industry as "crack spreads," has tripled in the last 12 months, according to Antoine Halff, head of energy research at Fimat in New York.

"Refinery profits have really been ballooning over the last few years," said Halff.

The cash bonanza has generated some interest.

"I get calls from everyone in the universe," said Peter Beutel, an oil analyst at the consulting firm Cameron Hanover.

But he said so far he hasn't heard of anyone building a new refinery.

A call to the Environmental Protection Agency, which is involved in the permitting process for new refineries and refinery expansions, didn't turn up any evidence of a new refinery permit. A spokesman there said refinery expansions are more likely, although the agency was still searching its database at the time of this article.

Louisiana, a state long friendly to oil and gas interests, is actively seeking a new refinery.

Marathon Oil (Charts, Fortune 500) has built a $3.2 billion refinery expansion, Valero (Charts, Fortune 500) has a $1 billion expansion, and the state is in talks with the Kuwait national oil company for a massive new 500,000-barrel-a-day facility, said Michael Olivier, secretary of Louisiana Economic Development.

But even in Louisiana, where Olivier said the Marathon expansion permit was approved in less than a year, no completely new refinery has been built nor are there solid plans for one.

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"I've heard a lot of people thinking about it," said Mike McKee, a Dallas-based director at KPMG corporate finance, the banking arm of the consultancy KPMG. "But it's a pretty daunting task."

McKee said investors outside the oil industry have the same fears as the oil firms, plus one other.

"Margins are better now than they have been in 20 years," he said. "But as an investor, you'd be looking at jumping in at a historic peak, and it gives you pause."

In short, investors, like the oil industry itself, are concerned that refining will one day revert to being a barely profitable business.

"These guys don't want to put money into a business that's historically cyclical," he said.

Over the last 25 years, McKee said the S&P 500 has generated percentage returns somewhere in the low teens, while refining has returned about half that.

"There's a good reason there's been some discipline in the capital markets," he said. "It's been a pretty tough story over a long period of time."

The gasoline demand debate

It's a main component behind high prices, but whether consumers are actually using more gas is a topic of dispute.

By Steve Hargreaves, CNNMoney.com staff writer

April 9 2007: 3:28 PM EDT

NEW YORK (CNNMoney.com) -- Ravenous demand for gasoline in the U.S. has been a main reason for the surge in prices over the last couple of months.

For the first time ever, gasoline demand failed to drop below 9 million barrels a day in the slow winter season, according to government figures.

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And demand growth is still chugging along at 1.7 percent a year. That's on the high side of normal - and a far cry from the expected easing we were supposed to see as Americans drove less and bought more efficient vehicles in the face of high energy prices.

But the authenticity of the strong demand numbers - which traders have used to help bid up gas prices - is a matter of debate.

"They're very flawed," says Tom Kloza, chief oil analyst at the Oil Price Information Service. "You'd have to do a lot of convincing to get me to believe this demand is coming at the pump."

Kloza takes a slightly sinister view of what's behind those numbers: basically, big trading companies are fudging the numbers they report to Energy Information Administration (EIA) in an effort to influence prices.

"I think the compliance in that sector is very poor," says Kloza, referring not so much to big oil companies such as Exxon Mobil (Charts), Chevron (Charts) or BP (Charts) but rather wholesalers and other middlemen that blend and store gasoline, as well as investment banks that take physical delivery of commodities.

"If I'm a wholesaler who makes money on prices going higher, I may forget to report something," he said.

Doug MacIntyre, a senior oil market analyst at the EIA, says the agency relies on numbers provided to it by the industry.

But "we don't take the numbers just as a given," MacIntyre said.

He says there are checks to ensure the accuracy of the data, such as referencing the current numbers with what the company has reported in the past.

MacIntyre says most of the mistakes EIA finds tend to be simple human errors, and that the agency has never accused anyone of deliberately falsifying the numbers.

Another trader also took a more conventional view of what's behind the demand numbers.

"We've seen some great job growth over the last couple of months, and it has gotten people moving into their cars," said John Kilduff, an New York-based energy analyst at Fimat, a brokerage firm.

The strong job growth is giving people money, which means they are less worried about paying high gas prices, according to Kilduff.

MacIntyre also says it took nationwide average gasoline prices above $3 a gallon before there was an actual drop in demand growth - and even then it was still a reduction in growth, not a reduction in gallons used.

Kilduff dismisses the notion that trading companies are deliberately manipulating the market.

"Every time there is an investigation, nothing comes up," he said. "Given the scrutiny the industry faces, that's a fool's errand."

Both Kilduff and Kloza agree that ethanol could be playing a small part in the strong demand numbers.

Because ethanol is only about 70 percent as efficient as gasoline, and because EIA measures gasoline that is already blended with ethanol when it computes its demand numbers, people need to use more gasoline to go the same amount of miles.

But both analysts say ethanol's contribution to rising demand is small, as the ethanol concentration in gasoline is typically less than 10 percent.

And MacIntyre notes that ethanol, which is added to gasoline to make it cleaner burning, replaced the toxic MTBE, which itself is about 20 percent less efficient than gasoline.

Behind high gas prices: The refinery crunch

When gasoline prices surge, a lack of refining capacity is often blamed. What's being done, and is it enough?

By Steve Hargreaves, CNNMoney.com staff writer

April 17 2007: 3:43 PM EDT

NEW YORK (CNNMoney.com) -- It's the same story every year.

Each spring, just before the summer driving season, gasoline prices skyrocket. And every year, these four words appear in news reports nationwide as a big reason for the runup: "lack of refining capacity."

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Then experts call for more refineries, politicians pledge to make the dirty behemoths easier to build, but guess what? Nothing really happens. Next year, repeat story.

So why hasn't a new refinery been built in the U.S. since 1976?

"There have been calls every year this decade for new refining capacity, yet no new projects initiated," said Geoff Sundstrom, a spokesman for AAA, the motorist organization. "Refining capacity has not kept pace with demand for gasoline."

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Numbers from the government prove Sundstrom correct.

In 1995 American drivers burned about 17 million more gallons of gasoline a day than the country produced, according to the government's Energy Information Administration. The difference was made up for by imports.

By 2005, the latest figures available, the gap had widened considerably to about 36 million.

"Consumer demand just continues to grow, and we can't grow as fast at the refining level," said Charlie Drevna, executive vice president at the national Petrochemical and Refiners Association, which includes companies like Valero (Charts), ExxonMobil (Charts), Chevron (Charts), and ConocoPhillips (Charts). "But there are plenty of economic reasons why that hasn't happened."

First off, experts note, gasoline, like any commodity, is subject to big price swings. After all, in the late 1990s it was selling for less than $1 a gallon, hardly an encouraging number if you're a refinery exec looking at making a decades-long, multi-billion dollar investment.

While retail gasoline prices are currently near record highs at just below $3 a gallon, where they might be five years from now is a matter of debate.

Some experts say new investment, in both alternative energy and conventional sources, will boost supply and could cut prices in half. If a global recession hit, the drop could be even more dramatic.

Others say rampant demand, especially in the developing world, will keep prices from going anywhere but up. For an oil executive trying to decide on a refinery investment, picking who's right is a tough call.

Secondly, stringent environmental laws and effective community organizing have made it very difficult to build a new refinery in the U.S.

"Everyone is quick to say "look at these refiners, they're driving up the price,'" said Phil Flynn Flynn, senior market analyst at Alaron Trading in Chicago. "But if I wanted to build a refinery tomorrow, I couldn't do it."

And then there's the public's newfound concern over global warming and its supposed commitment to do something about it. President Bush himself has called for a 20 percent reduction in gasoline use over the next 10 years.

"What refining executive in their right fiscal mind would say, gee, we need to add refining capacity right now," said Drevna at the refiners' association.

While refinery capacity may not be growing as fast as demand, it is growing.

For example, Drevna noted that expansion projects at the nation's existing refineries have had the effect of adding the equivalent of a brand new refinery every year. That increase came despite mandates for cleaner gasoline and diesel fuel, which take longer to make.

And the future looks even brighter.

"There is a tremendous amount of expansion," said Tom Kloza, chief oil analyst at the Oil Price Information Service, speaking of projects at existing facilities. "We will have a solid increase in North American refining capacity, but not for another two years."

Kloza said much of the expansion would come along the Gulf of Mexico and in the Midwest, an ideal spot to process heavy crude from Canada's emerging oil sand deposits.

The only place that might not see more capacity is the West Coast, said Kloza, where there is little refinery expansion planned, leaving the region more dependent on expensive imports.

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Overseas expansion is moving even more quickly, with $300 billion slated for refining projects over the next 20 years in places like India, the Caribbean, Mexico, the Middle East, Africa, and the Asia-Pacific region.

"I think there'll be a concern that the world added too much capacity and refining will go in the dumpster again," said Kloza.

Much of the international capacity will feed surging demand in the developed world. But some will also supply the United States and Europe.

"Partly what's going on here is part of a broader trend in manufacturing, and that is the movement of it offshore," said AAA's Sundstrom. "With it go environmental issues, tax structure, legal liabilities."