More oil, but same refining capacity
WASHINGTON — Even as U.S. oil production continues to grow, the nation’s refining capacity is barely budging, the research firm Morningstar said Monday.
Refinery capacity in 2017 was 18.6 million barrels per day, virtually the same as the previous year, even as crude production continues to set records, hitting 10.5 million barrels per day in April.
“Primary crude distillation capacity is not expected to increase more than a tiny fraction in 2018 either,” said Sandy Fielden, director of oil and products research at Morningstar. “Although major oil companies like Exxon Mobil have announced plans to expand existing Gulf Coast refineries to process additional shale crude in the coming years, there is little talk of building new large-scale plants.”
The report comes as U.S. refineries struggle under forecasts of declining gasoline demand in the decades ahead, as cars and trucks become more efficient and electric engines come into greater demand.
Companies such as Phillips 66 of Houston are shifting their operations toward chemical production and pipelines, to take advantage of the glut of cheap natural gas flowing out of U.S. shale fields.
“In 10 years, if we’re driving the same, we’re going to see less need for transportation fuel,” Phillips 66 CEO Greg Garland said last year. “Given that as a backdrop, you don’t want to invest in adding capacity in a declining market.”
For now, with the U.S. economy healthy and the shift to electric cars at least a few years off, refineries are running near full speed to meet demand. During one week in June, they produced a record 17.8 million barrels per day of fuel.
And while the large refiners sit on the sidelines, not everyone sees new refineries as a bad investment.
Smaller refineries are under development in Texas and North Dakota, positioned to take advantage of the glut of oil flowing out of shale fields such as Permian Basin in West Texas and the Bakken Shale in North Dakota. MMEX Resources, in Fort Stockton, is slated to complete its 100,000-barrel-per-day refinery there by year-end. The Woodlands-based Raven Petroleum plans a 55,000-barrel-a-day refinery near Laredo.
But these new plants will face much higher transportation
costs for their fuel than refineries along the Gulf, where there are extensive pipeline networks. The new plants also could face other headwinds.
Permian crude, which is sold at a discount because a lack of pipeline capacity makes delivery unreliable, is likely to cost more as new pipelines come online.
In Mexico, changes in currency exchange rates could also affect their profit margins.
“Pipeline congestion in the Permian means that crude costs are at bargain-basement levels, but they are not expected to stay that way for more than a year or so,” she wrote. “The combination of lower margins, higher distribution costs, and exchange-rate risk through selling into Mexico does not bode well for these projects.”