New refineries unlikely

It’s unlikely more offshore oil drilling would directly lead to new refineries in Florida — or anywhere

 
Charlotte Sun
July 25, 2008

By NEIL HUGHES
Staff Writer  

Regardless of whether oil drilling occurs off the coast of Florida, Libby Cheney figures that it’s probably a long-shot that Florida will get into the refinery business.

“I sometimes wonder if it’s not impossible to build a brand new refinery with permits,” said Cheney, vice president of corporate support for Shell Oil (and no relation to the U.S. vice president).

Assuming drilling takes place, and an unexpectedly incredible amount of oil is not found in the eastern Gulf of Mexico, pipelines that intersect all over the Gulf floor can easily transport oil to many of the country’s other refineries.

And it’s unlikely any drilling would result in a need for drastic refinery expansions. The U.S. Mineral Management Service estimates there are roughly 3.6 billion barrels of oil in the eastern Gulf. That’s enough to feed the U.S. oil consumption rate of 20.6 million barrels-perday for roughly six months, according to the U.S. Energy Information Administration.

Numerous expansions of existing facilities have taken place over the last 30 years, but in that time an entirely new refinery has not been built in the U.S.

“There are a number of reasons why a brand new refinery from the ground up hasn’t been built since 1976 in Garyville, Louisiana,” said Bill Holbrook, communications director for the National Petrochemical & Refiners Association.

Consider, he said, that estimates for building a new refinery suggest it would take 10 to 15 years.

“A lot of the impetus behind expanding capacity in the United States through expansion projects at existing facilities has purely been a matter of time,” he said. “It gets product to consumers faster than it would be to build one from the ground up.”

Another problem: Refineries require a huge investment and don’t yield high profit margins, Cheney said. Much like with the time factor, it makes more economic sense to expand existing facilities rather than make a major investment that would take years to break even on.

“There’s not a big incentive just for companies to go out philanthropically and build a refinery,” Cheney said.

Rising oil prices have led to a steep decline in margins at refineries over the past two quarters, Holbrook said.

“We’re the first to bear the brunt of high crude prices,” he said. “We’ve got to buy the oil to make the gasoline.”

Thirty-two out of 50 states currently have oil refineries in them. Together, they can produce 17.4 million barrels per calendar day of crude oil, according to the U.S. Energy Information Administration.

And although no new facilities have been built, expansions on existing refineries have, for the last decade, produced the equivalent capacity of one new large-scale refinery per year, said Joanne Shore, a senior petroleum analyst for the U.S. Energy Information Administration.

“In general, it makes more economic sense for refiners to expand existing refineries,” Shore said.

That’s not to say that some companies aren’t trying to build new facilities. Proposed refineries in South Dakota and Arizona have been in permitting purgatory for years, although neither facility has a traditional big oil company behind it.

But perhaps the largest obstacle in building new facilities is the fact that no one wants a refinery in his back yard.

Enough pipelines have been put in place in the U.S. that transporting oil to a far-away refinery is not a major concern. For example, oil drilled in Alaska is sent to refineries in California.

And with rising oil prices fueling the current political push to invest in alternative energy sources, oil companies are left to wonder whether continuing oil refinery expansions is a wise move.

“Why would we want to invest billions of dollars annually in expanding capacity,” Holbrook said, “only to have that abandoned 10 years down the road perhaps?”

But with petroleum the key ingredient behind everything from gasoline to lipstick, it’s unrealistic to expect that U.S. dependence on oil will subside anytime soon.

“There’s still going to be an incredible demand for our product,” Holbrook said. “This country is nowhere near close to replacing the hydrocarbon molecule.”