Independent refiners take advantage of crude bottlenecks; see bright future from IMO opportunities
Author: Sam Davis
Earnings season has kicked off with a bang as U.S. Independent refiners posted strong quarterly results driven by logistically related crude discounts and high refinery utilization rates. During the third quarter, WCS, Bakken and Midland crudes all priced at historically wide markdowns vs. the WTI benchmark as production growth from these regions exceeded available takeaway capacity.
As expected, the topic of crude discounts and its sustainability featured prominently during the recent earnings calls made by the independents. Also featured was the topic of IMO. With a little more than a year to go before the sulfur spec change goes into effect on January 1, 2020, executives were being asked about their preparedness and how they expected pricing relationships of crude and refined products to play out.
In this edition of the blog, we summarize the highlights from the earnings calls and share our key takeaways.
Valero kicked things off by announcing that their board of directors had approved a $975 million project to construct a 55,000 barrel per day coker and sulfur recovery unit at the Port Arthur refinery. The project is scheduled for startup in 2022, with benefits expected from improved turnaround efficiency, reduced feedstock costs, and increased throughput capacity. While the project may not be considered an ‘IMO’ project, Valero expects to see upside potential from upgrading resid into distillate fuels.
The company also announced the August completion of the expansion project at the Diamond Green Diesel plant to 16,500 barrels per day of renewable diesel production capacity. Development continues on a project to further expand the facility’s production capacity to a total of 44,000 barrels per day, with a final investment decision expected before year-end.
These two projects expand the company’s available distillate production for supply into the bunker fuel market.
On their earnings call, Phillips 66 reiterated their position as the global leader in coking capacity, achieved through a number of previous refinery investments over the past decade. The company feels well positioned with higher diesel yields relative to their peers and significant hydro-treating capacity, and believes their portfolio is well positioned without significant future capital investment requirements for the IMO environment.
Also mentioned on the call is that Phillips 66 Partners is constructing the Gray Oak Pipeline, anticipated to be in service by the end of 2019. The pipeline will transport crude from the Permian and Eagle Ford to destinations in Corpus Christi and Freeport, including the Sweeny Refinery. Supported by customer commitments, capacity of the pipeline will be 900,000 barrels per day.
Marathon announced the October 1 transaction close of the Andeavor acquisition, creating the largest independent refiner in the U.S. with crude capacity of 3 million barrels per day. With the transaction behind them, the company is now focused on unlocking the $1 billion of run-rate synergies it has identified.
On crude logistics, Marathon announced its involvement in the Permian to Gulf Coast Pipeline, which will enable Delaware Basin and Midland Basin crudes be originated out in Wink, Crane or Midland and come down into the Houston, Texas City market as well as other markets to supply its Galveston Bay refinery. They also expanded the Ozark Pipeline as well as the Wood River to Patoka Pipeline to get Cushing light barrels into their refinery system.
Marathon highlighted the recent diesel maximization project completed at the Garyville refinery earlier this year and the coker expansion project also at Garyville slated for 2020 as current investments for IMO readiness.
HollyFrontier closed on their previously announced acquisition of Red Giant Oil Company during the third quarter. HollyFrontier Lubricants & Specialty Products is the largest North American group III base oil producer, and the company would like to grow their Lubricants business further. Red Giant is one of the largest suppliers of locomotive engine oil in North America so HollyFrontier’s strategy is to use the acquisition to further integrate into its end markets.
According to the company, no capital investments are required to benefit from IMO, and they are well positioned to take advantage of the sulfur spec change due to wide crude discounts expected from their exposure to Canadian heavy crude and high distillate yields from their refineries.
PBF announced plans to restart an idled coker at the company’s Chalmette refinery. The project is expected to cost $110 million and be completed in 2019. PBF expects the coker project will be part of a plant-wide optimization effort to improve profitability following the acquisition of the site three years ago. The company expects the coker to be operational by this time next year and yield great benefits heading into IMO 2020.
With supply of highly discounted Canadian heavy crudes into its East Coast refining system, along with the investments at Chalmette, PBF expects to be well positioned to benefit in 2020.
The third-quarter earnings calls provided a window into how refiners are executing their strategies to improve financial performance as we head into IMO 2020.
Access to crude: As logistics infrastructure lags production growth, refiners continue to explore opportunities to increase access to price-advantaged crudes. During the quarter, we saw how crude differentials widened across Canada, Bakken, and the Permian as growing production exceeded takeaway capacity. With pipelines being full, rail has once again re-emerged as the marginal barrel for determining transportation costs and crude-pricing. Expect refiners to continue to exploit these wide differentials with ‘access to crude’ projects for supply into their refining system or export markets.
Focus on Earnings Quality: With a focus on high-return projects, refiners have turned their backs on billion dollar refinery investments and are now chasing optimization projects that require lower capital spend. Valero’s announcement of a coker expansion at Port Arthur should not be seen as an indication of things to come, but rather opportunistic spend that benefits them in a post-IMO world.
Reliability & Operational Excellence: Refinery utilization rates for many refiners exceeded 95% during the quarter as wide crude discounts incentivized refiners to maximize runs and improve uptime. Going forward, we expect refiners to focus on turnaround efficiency to minimize downtime, and ensure they have robust maintenance, reliability and operational excellence programs in place. As crude discounts and product cracks are expected to provide refiners a margin boost, operational downtime will be in focus. The unfortunate incident at the Husky refinery at Superior bears this out as the refinery is scheduled to restart in 2020 and not currently capturing market opportunities from the wide crude discounts.
IMO Readiness: Refiners all seem ready for the Jan 1, 2020 IMO spec change. With decades of investment in coking and hydrocracking capacity, the industry stands ready to maximize distillate fuels production and upgrade lower quality residual fuels. With the exception of a handful of IMO related projects, refiners are mainly tweaking their unit configurations to position themselves for optimal use of their assets. The industry is well-known for figuring out how to respond to the market demands and due to the complexity of the U.S. refining system, there are lots of knobs refiners have at their disposal that will let them optimize, react to market conditions and then re-optimize again.
Turner, Mason & Company, continues to monitor developments in the maritime and refining industries as we approach IMO 2020. Our latest views are being incorporated in our Crude & Refined Products and World Refining Construction Outlooks, which will be issued to clients with our 2019 publications in February and August. If you would like more information on this, or for any specific consulting engagements with which we may be able to assist, please go to our website and send us an email or give us a call at 214-754-0898.