Refiners investing to capitalize on flood of Permian crude
November 20, 2018
Gulf Coast oil refiners are looking to take advantage of the flood of cheap oil from West Texas by investing millions, if not billions, of dollars to expand and upgrade refineries to handle lighter grades of crude flowing from the Permian Basin and other shale plays.
Most Gulf Coast refineries are configured to process heavier crudes from Latin America and Canada, which has limited their abilities to capitalize on the record production from the Permian, where output has reached 3.7 million barrels a day — about one-third of U.S. production. Those refining constraints have come into focus recently as crude from the Permian trades at significant discounts to U.S. and international benchmark prices, in part because a lack of pipelines have made it difficult to deliver oil from West Texas to Gulf Coast markets.
Some of nation’s biggest energy companies are considering expanding their refining capacity to capitalize on their growing production in West Texas. Exxon Mobil of Irving and Chevron of San Ramon, Calif. have each invested billions of dollars in acquiring and developing holdings in the Permian.
Exxon Mobil is in the midst of engineering, designing and planning for an additional unit at its Beaumont refinery, which would add roughly 250,000 barrels per a day of additional capacity to process light crude, according to the company. Construction of the new unit is expected to start in 2019 with a startup expected in 2022. A proposed expansion at the Baytown refinery would also add another 60,000 barrels per a day of added light crude capacity there, although the timing on that project isn’t clear, a spokesperson said.
The refining projects are part of the $20 billion of investments Exxon has planned for growing its manufacturing capacity on the Gulf Coast, including expansions of its petrochemical plants.
Chevron said in October that is considering buying or building a refinery in the Houston area to take take advantage of its increasing production in the Permian Basin, where the company holds 2.2 million net acres. Chevron has a big petrochemical footprint in Houston through its joint venture with Philips 66, but it doesn’t have any Texas refineries.
Analysts have speculated that Chevron is targeting the Pasadena refinery owned by the Brazilian national oil company Petrobras as a potential acquisition. Chevron declined to comment on whether it’s considering buying the Pasadena refinery.
Other companies already have upgraded refiners to benefit from the Permian boom. Valero in 2016 invested $750 million into adding crude topping units at refineries in Houston and Corpus Christi to process lighter crude from the Permian, according to the company. Motiva’s Port Arthur refinery underwent a $10 billion expansion in 2012 that boosted its light crude capacity, and made it the largest refinery in the U.S., according to the company.
Several other refineries — including Shell’s in Deer Park, Convent and Norco; Marathon’s Garyville Refinery in Louisiana; and Phillips 66’s Sweeny Refinery — say the can process lighter Permian crude. They declined to comment on their light crude capacity.
Meanwhile several refineries have gone about smaller “de-bottlenecking” projects to boost light crude processing capacity, said Mark Broadbent, principal refinery analyst at the energy research firm Wood Mackenzie. “De-bottlenecking” means making small changes to increase a plant’s efficiency with steps such as replacing or adding equipment, adjusting cooling or compression capacity and reconfiguring pipes, control valves and choke valves.
“Almost all refineries have been looking to these types of projects and trying to understand how they can have incrementally more light crude,” Broadbent said.
The projects probably are too small to make the news individually, but collectively they have significantly increased the region’s collective capacity to refine light crude, Broadbent said.
Industrial Info Resources, a Sugar Land market research firm, is tracking more than $1.3 billion of de-bottlenecking projects among oil, gas and chemical plants in the U.S. and Canada this year, although the firm said most projects are tied to oil sand projects and petrochemical, rubber and plastic projects.
The possibility of processing more light crude has seemed particularly attractive this year, with oil in Midland, the heart of the Permian region, trading at discounts of as much as $20 a barrel this summer compared to oil delivered along the Gulf Coast. Midland prices were about $16 a barrel lower than Brent crude, the international benchmark, according to the research firm IHS Markit.
It’s not clear how long those discounted prices will last, however, particularly as more pipeline projects come online next year, said Debnil Chowdhury, head of North American refining at IHS Markit. That could complicate decisions of whether to make the big investments to upgrade refineries.
In addition, demand for gasoline is slowing as vehicles become more fuel-efficient and more electric cars get on the road, analysts said.
“If you’re going to spend billions on a refinery, then you need to get a return of over a 30- to 40-year period,” Sandy Fielden, director of oil and products research for Morningstar, a Chicago investment research firm. “There is no question there will still be demand for fuels in 30 years, the question is how fast will that demand” decline.