After the coronavirus pandemic-induced oil price collapse and resulting volatility, the integrated oil and gas majors have not been alone in making difficult choices. Faced with historically low crude differentials, depressed utilization rates and soft gasoline crack spreads, many U.S. downstream companies have idled or plan to convert refining facilities to process renewable fuels instead.
"Given the disruption to refined product demand, the exceptionally poor refining margin environment has driven a substantial chunk of capacity rationalization across the refining landscape — even at a faster and larger pace than optimists had hoped," Raymond James analyst Justin Jenkins wrote in a Dec. 7 report.
U.S. refiners responded to the demand pullback with closures and conversions into the fourth quarter. Raymond James said global refinery capacity closures stand above 2.0 million barrels per day, while U.S. refinery capacity shutdowns are near 1.2 million b/d.
Even before the pandemic crushed petroleum demand, U.S. refining margins were getting squeezed in the final quarter of 2019. The International Maritime Organization's marine fuel regulation, IMO 2020, offered little support, but margins were hardest hit by an overbuild in capacity, a slowdown in the economy and U.S.-China trade tariffs.
Refining margins at the U.S. Gulf Coast, home to the largest share of the country's refining capacity, plunged to multiyear lows after oil prices collapsed in the spring of 2020. Crude throughput subsequently dropped to historic lows, with margins still lingering below the five-year average range and likely to remain "in the gutter," analysts from Tudor Pickering Holt & Co. said in a Nov. 17 research report.
"[I] would say the pandemic-demand shock, clearly, retested margin lows, and there's not a real analog for the pace of recovery," Mark Nelson, Chevron Corp. executive vice president of downstream and chemicals, said during the oil major's third-quarter earnings call in October.
Raymond James analysts do not anticipate a second wave of U.S. refinery closures but do expect many of the less-advantaged idled facilities may not be returned to service.
"Bringing a refining plant back online is not always a smooth process," Jenkins wrote. "Not only does resuming operations cost money — usually these plants are not in the best of shape before closing down, so the operator likely has to shell out for meaningful maintenance before operations can resume. All in all, it's possible some capacity could come back online in the 2022-2023 timeframe, but by and large, we think these closure announcements will mostly prove permanent."
Responding to the dismal margins, in the summer, Delek US Holdings Inc. idled several units at its 74,000-barrel-per-day Krotz Springs, La., refinery to save about $32 million a year in operating costs.
"If the margin environment improves and we feel we can offset the operating cost reductions with improved cash flow from the margins we'll restart it," Delek Senior Vice President of Investor Relations and Market Intelligence Blake Fernandez said during the company's third-quarter earnings call in November.
PBF Energy Inc. reduced the combined capacity of its Paulsboro, N.J., and Delaware City, Del., refineries by 85,000 b/d to 260,000 b/d as part of a cost-cutting program.
In November oil major Royal Dutch Shell PLC started to permanently shut down its Convent Refinery in Louisiana after failing to find a prospective buyer for the facility.
Marathon Petroleum Corp. indefinitely shut its Gallup, N.M., and Martinez, Calif., refineries in July. Marathon is also considering converting Martinez into a renewable diesel processing facility. The decision to idle the Martinez refinery was due to cost but also regulator and investor pressure, executives said during the company's second-quarter earnings call in August.
Marathon CEO Michael Hennigan said the cost of the first phase of the project would require "about the same amount of capital that we would put into a planned turnaround" at the facility. "So we really hit a decision point and decided to pivot and look at renewable diesel production as opposed to refined product production," Hennigan said during the call.
Valero Energy Corp. was enthusiastic about renewables before the pandemic and is moving ahead with constructing a renewable diesel plant at its Port Arthur, Texas, refinery, to expand the company's renewable diesel production capacity to 1.1 billion gallons annually. Valero's renewable diesel expansion project at its St. Charles refinery in Louisiana should be completed in 2021.
HollyFrontier Corp. decided to reconfigure its Cheyenne refinery in Wyoming to become a renewable diesel production facility. Due in part to state regulations, Phillips 66 is converting its San Francisco refinery in Rodeo, Calif., into a renewable fuels plant. Phillips 66 also plans to shut its Santa Maria refining facility in Arroyo Grande, Calif., in 2023.
