US refinery capex to stay robust as owners target upgrades, quicker ROI
Despite narrower refining margins, US petroleum refinery capital spending will remain robust in the next two years, with about $9.2 billion worth of active capital projects (scheduled for construction start in 2016-2018) planned for 2016 and $9.3 billion in projects in 2017, according to market research firm Industrial Info Resources (IIR).
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Some $8.1 billion worth of active projects in the US with a construction kick-off in 2016-2018 are projected to be new builds and about $1.7 billion will be unit additions, based on the pipeline of announced projects, with the rest of the spending going into plant expansions and other in-plant capital.
Future spending in the US will be mostly driven by smaller, quick-return optimization & reliability projects, facility upgrades to address octane loss issues, as well as gasoline production increases as domestic refiners take advantage of cheap domestic feedstock, comply with environmental regulations and export more petroleum products to meet rising global demand.
There are currently a total of $10 billion active refining projects under construction in North America compared to $32.5 billion in projects in the Middle East, Chris Paschall, IIR's vice president of global research for the petroleum refining industry, said at a webinar on March 15.
By contrast, projects at the planning & engineering stage that are planned to begin construction in 2016-2018 total about $58 billion (347 projects) in North America compared to $53 billion (280 projects) in the Middle East. Though not all of this planned investment will move forward, Paschall expects to see robust spending activity in North America in 2016.
Total capital spending in the US refining and marketing sector in 2016 is projected to rise from $13.5 billion in 2015 to $14.6 billion in 2016, up 8% year on year, according to the Oil & Gas Journal (OGJ).
OGJ’s projections assume oil prices of about $35 per barrel (b) for Brent and West Texas Intermediate (WTI) in 2016.
Brent and WTI crude oil prices are expected to average $34/b in 2016 and $40/b in 2017, according to the Short-Term Energy Outlook (STEO) published by the US Energy Information Administration (EIA) on March 16.
Refining margins drive spending
Crack spreads, a good indicator of refiner profitability, will largely influence which type of capital projects move forward.
Refining margins in 2015 were booming, as oil prices fell quicker than product prices, and lasted much longer in the year than anticipated due in part to robust gasoline demand spurred by low pump prices, Paschall said.
Margins started to tighten in the second half of 2015 as distillate and gasoline inventories built up.
The US refining industry now appears to be transitioning from a period of high margins and record throughputs, though refining margins in 2016 are expected to remain good, albeit not as good as in 2015, Paschall said.
Refining margins are driven as much by strong demand growth fundamentals as from lower feedstock costs.
Despite lower US gasoline prices, Paschall expects gasoline demand in the US to contract (0.4%/annum) in the next few years, largely due to greater vehicle energy efficiencies and structural shifts in the US economy, among others. Diesel demand in the US is projected to increase 0.7% to 4 million barrels a day by 2020, according to IIR.
Most of the growth in future demand will come from non-OECD countries.
“What is going to drive demand in the more developed countries is [whether they can] export that product to non-OECD areas or will those areas develop their own infrastructure,” Paschall said.
Smaller projects, quicker returns
Though rising diesel demand after 2008 prompted many US refiners to channel investments into increasing distillate yields, an expected slowdown in distillate demand coupled with new capacity additions around the world have swelled distillate inventories, making future distillate capacity investments less attractive in the US, Paschall said.
As a result, expansions and yield increases in the US will increasingly target other parts of the barrel, such as gasoline and LPG, where consumer demand is projected to grow and profits to stay healthy.
More basic spending will also focus on meeting Corporate Average Fuel Economy (CAFE) standards in the US, which will push up the demand in the long term for more octane in the domestic gasoline pool.
IIR is currently tracking nine projects in the US worth almost $700 million in spending that are geared to address octane loss issues. Valero Energy, Marathon Petroleum and Alon USA are all expanding or considering building alkylation units to meet future octane demand.
IIR is also tracking 37 projects worth $1.6 billion that will address the US Environmental Protection Agency’s (EPA) Tier 3 mandate to reduce the sulfur content of gasoline of by January 1, 2017.
As most refineries have now undergone or are completing upgrades to meet new regulations over the last few years, there are fewer large capital projects planned or taking place. Many companies are shifting their focus to maintenance and small capital projects, while deferring strategic or major expansion projects.
Emmanuel Cavazos, capital projects site manager at Ineos Olefins & Polymers USA, is seeing an increase in smaller projects of less than $100 million, which will be “more specific, unit-driven and address optimization, reliability, longevity and sustainability issues,” and deliver quicker returns.
In contrast to its spending in the last 5-6 yearsm HollyFrontier, for example, is now prioritizing smaller, more incremental projects of $30-50 million that will yield 1-2-year paybacks, sources at the company told Petrochemical Update.
The company has an investment program targeting the execution of about $325 million in growth projects in 2015-2018 – $85 million of which will go into modernization and debottleneck projects in 2016 – and has 15 projects in “various stages of planning & execution,” the company said in a March 2016 presentation.
Though recent project fall-out rates - the difference between planned and actual industrial project spending - are currently in line with historical trends, uncertainty around the true nature of demand growth in the market will continue to challenge the owners of larger projects, Paschall said.
Meanwhile, US refiners have lost some of the crude advantage as the WTI-Brent spread has narrowed over the past four months after the lifting of the ban on US crude oil exports.
Though proposed spending on grassroots facilities in the US and Canada in 2017 could see a sharp rise on the back of several big announcements, this grassroot/expansion spending continues to see delays as owners struggle to secure financing and investment partners.
Most recently, ExxonMobil has put on hold a possible project to double the size of its 344,500 barrel per day Beaumont, Texas, refinery due to cuts in capital spending amid falling oil prices, Reuters reported on March 10, citing sources familiar with the company's plans.
After bottoming in 2015, US refinery planned turnaround activity will also pick up slightly in 2016, though the number of units that are coming down will be smaller year on year, according to Paschall.