“Start Me Up” – Refinery Construction Outlook Part 2: North America and Europe

By Robert Auers

Today, after taking a week off, we continue our series discussing various major refinery projects covered in our recently released World Refining Construction Outlook (WRCO).  Today we will focus on Europe and North America.

North America – “She’s a mean, mean machine”

We’ve expressed before that we believe North America, and especially the U.S., possesses the most efficient and competitive system of refineries in the world.  Despite stagnating domestic demand over the last ten years, U.S. refining capacity has continued to expand and thrive through the growth of exports, particularly to Latin America.  Going forward, we see a continued stream of mostly small debottlenecking projects at existing facilities.  However, one project that stands out is Exxon’s massive proposed expansion at its Beaumont, TX facility.  The refinery has a current capacity of 362 MBPD and processes about 80% domestic crude oil, along with notable volumes of Canadian heavy, which amounted to ~30 MBPD in 2017.  Exxon has proposed roughly doubling the facility’s crude capacity, with all of the incremental crude barrels coming from cost-advantaged US LTO plays, especially the Permian basin, where Exxon has recently focused its upstream investment.  If completed, this expansion would make Exxon Beaumont the largest refinery in the U.S., surpassing Motiva’s 600 MBPD Port Arthur plant.

This project could provide an important outlet for the rapidly growing volumes of light, sweet US crude oil.  Prior to the U.S. light tight oil (LTO) boom, the western hemisphere faced years of growing heavy sour production from Canada and Latin America, along with shrinking volumes of light crude oil production.  As a result, most Gulf Coast refiners invested significant sums of money to process cheaper heavy crude.  However, as a result of the LTO boom, coupled with declining volumes of heavy crude from Venezuela and, to a lesser extent, other Latin American Countries, the heavy/light spread has narrowed considerably and the economics for new projects on the Gulf Coast now often favor those for processing the growing US light, sweet production.  Less investment is capital is needed to build the equipment necessary to refine these barrels due to a considerably higher portion of these barrels being made up of distillates and lighter material.  Therefore, less upgrading capacity in the form of FCCs, hydrocrackers, and cokers is required to produce valuable transportation fuels.  Moreover, the small quantity of vacuum residue produced by U.S. LTO is very low in sulfur and will be able to make it into the 0.5% S bunker fuel market post-January 1, 2020. This gives the resid produced from US LTO relatively high value as well at that point.  At the same time, many buyers unfamiliar with these crudes have been hesitant to purchase them.  There are few reasons for this phenomenon.

First, the quality of these barrels can vary substantially, not only between different basins, but also from well to well.  Furthermore, infrastructure to support segregation of the large number of different streams is not fully in place.  This can make it difficult for refiners to control crude quality.  Improved infrastructure and segregation abilities should help improve this situation going forward and allow better quality streams (generally those <45 API) to sell at a premium to the lighter grades.  Second, blending LTO with heavy crude high in asphaltenes (Western Canadian crude, for instance) can lead to asphaltene precipitation at elevated temperatures, promoting fouling in crude preheat trains.  This can limit refiners’ ability to blend LTO with heavy crudes.  Lastly, many refineries that have been designed for heavier crude slates have difficultly switching to a diet of only LTO (which is typically in the 40-50 API range) without either decreasing total crude runs or investing in new equipment, such as preflash towers, light ends recovery, and naphtha processing.  Granted, these investments are much less expensive than those required to run a heavier slate, but they can still be significant and can limit a refiner’s ability to easily lighten their crude slate beyond a certain point.

Exxon likely sees the Beaumont expansion as a possible guaranteed home for a large portion of its growing Permian production and a way to take advantage of reasonably priced LTO that would otherwise go to exports.  Moreover, growing product demand in Latin America, accompanied by issues in the region’s downstream sector, likely provide a home for the incremental product production.  Exxon has not yet announced a final investment decision on the project, but, if the project is approved, plans to begin construction in 2019 and finish in 2022.

Other notable refinery expansion projects in the U.S. are much smaller in scale, but, with the exception of a few focused on the processing of Canadian heavy in the Midwest, generally focus on increasing the processing capacity of U.S. LTO as well.

Europe – “Tough me up”

Europe, as of late, tends to lead one to think more of capacity rationalization and refinery closures than of expansions and upgrades.  As such, we see a relatively small number of projects being completed there over the next several years.  Those that will be completed are mostly to “toughen up” some of the remaining plants through addition of new upgrading units, especially cokers and hydrocrackers.  The most prominent example is Exxon’s Antwerp project, set to start up in the first half of this year.  While the project, slated to cost $1.9 billion, will not increase the refinery’s overall capacity from its current 320 MBPD, it will allow for the processing of a significantly heavier slate due to the addition of a new 50 MBPD coker.  This will make Exxon’s Antwerp plant one of the more complex facilities in Western Europe, giving it some of the most optionality in crude sourcing in the region.  Furthermore, it could potentially provide a home for a portion of Exxon’s new Hebron production from Eastern Canada. It also puts the facility in a favorable situation for the 0.5% S bunker regulations, which take effect January 1, 2020.  Grupo Lotos, in Poland, has adopted a similar strategy through the construction of a coker at its 220 MBPD plant in Gdansk, also set to start up this year.  Gdansk will likely not significantly alter their crude slate, but will no longer produce fuel oil, and this will likely allow the plant to fare better in a low sulfur bunker world.

We also note that Turkey, which we include in the European section of our World Refinery and Construction Outlook, is in the midst of series of refinery upgrade projects to increase their production of low sulfur fuels and is nearing completion at its new STAR facility in Izmir.

TM&C recently completed and published its 2018 World Refinery and Construction Outlook (WRCO).  The WRCO includes a much more detailed list including all announced global projects with total crude capacity and individual unit capacities for each project.  Furthermore, each project we track is listed by region and ranked based on its probability of success.  In addition, a detailed discussion of the regional factors and trends that are affecting refinery construction projects is provided.  If you would like more information on this or our other products, 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.