By: Sam Davis
In this edition of the blog, we feature announcements made last week by Oil Majors, Chevron and ExxonMobil, to expand refining capacity by processing increasing volumes of Permian crude. Chevron announced on January 30, 2019, that it had reached an agreement with Petrobras Americas to acquire the assets of its subsidiary, Pasadena Refining System Inc. (PRSI) for $350 million. The transaction includes the 110,000 b/d refinery in Pasadena, Texas, crude and refined products storage with capacity of 5.1 million barrels, as well as strategically located land on the Houston Ship Channel for future expansion opportunities. A day earlier, Exxon made the long awaited announcement that the company had reached a final investment decision to expand its Beaumont refinery crude capacity by 250,000 b/d with start-up expected in 2022.
Both companies have made significant investments in the Permian basin which continues to be the fastest growing source of light sweet crude production in the U.S. with volumes projected to reach 5.3 million b/d by 2025, up from 3.3 million b/d in 2018. Consistent with their individual strategies of optimizing the entire hydrocarbon value chain, both Chevron and Exxon seized on the opportunity to further integrate their upstream and downstream operations through the processing of equity crude.
For Chevron, the acquisition of the Pasadena refinery positions the company to enhance margin capture as we enter a period of higher refining margins between now and 2025. The refinery was also acquired at an attractive price with the valuation well below where recent refinery sales have transacted. With a purchase price of $350 million, excluding the value of inventory, Chevron was able to acquire the site for $375 per complexity barrel. Recent comparable refinery transactions include U.S. Oil & Refining’s 42,000 b/d Tacoma, WA refinery sale to Par Pacific for $358 million (or $2,130 per complexity barrel). Last year, Husky paid $435 million (or $1,070 per complexity barrel for the Superior refinery in Wisconsin).
The Pasadena refinery processes primarily domestic U.S. crudes sourced mainly from the Eagle Ford and the Permian Basins and is well positioned to take advantage of growing production from both regions. From Chevron’s standpoint, it provides a secure source of demand for it’s growing proprietary production from these same regions. It lacks the ability to process heavy crudes from Canada or Latin America due to the absence of an operational coker (the plant had a coker, but it was damaged beyond repair in a fire in 2011). The Nelson complexity index for the refinery is 8.5, compared to the USGC regional average of 12.8. This has led to the refinery not being able to capture wide light-heavy crude discounts that other Gulf Coast refineries have been able to benefit from in the past. The refinery also lacks a sufficient diesel hydrotreater to allow it to upgrade distillate into Ultra-Low Sulfur Diesel (ULSD). Due to its low complexity, the refinery also has lower clean product yields compared to other Gulf Coast refineries (Figure 1).
With this acquisition, Chevron has the opportunity to leverage its operational and financial strength to improve the performance of the refinery. The site had been underinvested in during its ownership years by Petrobras, who has been faced with mounting debt from corruption scandals that have plagued the company. In many ways, the sale of Pasadena marks an end of a long and troubled history at the site dating back to 2006 when Petrobras acquired a 50% stake in the refinery for $360 million from the Astra Group. Just a year earlier, Astra had purchased the entire site for just $42.5 million. In 2012, Petrobras made a bid for the remaining 50% stake in the refinery although with the put option value that Astra had along with legal disputes, drove the price up to $820 million. The series of mismanagement by Petrobras put a financial strain on the company to invest in maintaining and upgrading the facility.
Chevron also has the opportunity to supply refined products into its Gulf Coast retail fuels network from the Pasadena refinery. Additionally, the acquisition includes 143 acres of land located adjacent to the refinery which the company has an option to use for future refinery expansions. Should Chevron choose to further increase refining capacity at Pasadena in the future, it will have the opportunity to export increased volumes of refined products above and beyond existing capacity volumes into the Mexican market where the company has been expanding its retail presence. By the end of 2018, Chevron had 100 retail stations operating in Mexico with plans to add 500 more sites over the next two years.
The Pasadena refinery could also provide Chevron with some operational and cost management synergies with its existing 330,000 b/d Pascagoula refinery in Mississippi.
Although not a refinery acquisition like Chevron, ExxonMobil’s announcement of the Beaumont refinery expansion is significant as it marks the largest single refinery expansion since Motiva completed its 325,000 b/d expansion at the Port Arthur refinery in 2012. When completed in 2022, Beaumont is expected to be the largest refinery in the U.S. In addition to the 250,000 b/d crude unit, the refinery is reportedly adding a kerosene hydrotreater, diesel hydrotreater and benzene recovery units that will be integrated into the existing facility. The expanded site will produce additional gasoline, jet, diesel and intermediate products for export markets which we expect will become increasingly competitive given the timing of expected refinery startups from Lime Bay Tree’s St. Croix refinery and the Isla refinery in Curacao.
Turner, Mason & Company continues to monitor developments on these refinery expansion projects to assess the impact on supply, margins and refinery competitiveness. 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.