Driving Discussions: US Spring Refinery Turnaround

Get a full view of the US refining market during the spring turnaround season in this new podcast. US Products Associate Editor Jason Metko sits down with Senior Correspondent Nathan Risser, to discuss a series of topics including: 

• A high volume of turnaround work
• How a pair of non-US refineries may affect the landscape
• Investment strategies and locations for refineries
• Market expectations for 2024

Transcript

Jason: From Argus Media, this is "Driving Discussions," a podcast series focusing on the forces affecting North American road fuels. Greetings and salutations once again, one and all. I'm Associate Editor of U.S. Products, Jason Metko. And on this edition of the series, we chat with our senior correspondent, Nathan Risser, with our focus on the upcoming spring refinery turnaround season. Nathan, appreciate the time as always, my friend. This is going to be quite the heavy spring maintenance season, I understand. How are things shaping up as we approach the month of March here in 2024?

Nathan: Yeah, hey, Jason. Thank you for having me. So, you're right, what may be one of the heaviest U.S. refinery maintenance seasons on record is underway. It's likely to send motor fuel inventories lower as we head into summer driving season here in the U.S. From what we've been tracking at Argus, there are turnarounds planned at 13 U.S. refineries, totaling up to 3.4 million barrels-a-day of capacity in the first half of the year. The bulk of that work is concentrated in the first quarter on the U.S. Gulf Coast.

So, this heavy turnaround season is coming after U.S. refiners were pretty reluctant to spend money on maintenance when faced with narrow refining margins during the COVID-19 pandemic, and then not wanting to take facilities offline during the post-COVID demand boom, which resulted in historically wide refining margins in 2022. So, there's been this backlog, this buildup of work that needs doing. So, yeah, the major turnaround season is underway, but it looks like it will peter off towards the end of March, especially as an Arctic cold snap in the U.S. in January took some plants offline, which led refiners to accelerate their plan turnarounds, given that their facilities were already down.

Now, what do all these turnarounds mean for refined products markets? Coming into 2024, U.S. road fuel stocks had posted their largest two-week build since EIA inventory data began, and those combined diesel and gasoline stockpiles continued to build until late January. Since then, inventories have fallen with refiners running at average 81% utilization rates in the week ended 16th of February. That's five percentage points lower than the same week last year. On the Gulf Coast, refinery utilization rates in the week ended the 2nd of February, were even at 77%, their lowest level since September 2021.

So, even though the U.S. started the year with a surplus of refined product stocks, these are expected to, "Draw materially," according to analysts at Piper Sandler as we head into the peak summer driving season. Valero and Marathon both said in recent Earnings Calls that that draw in inventories driven by the turnarounds as well as a transition to more expensive summer grade gasoline blends is likely to support wider refiner margins. Valero also noted on its most recent Earnings Call that the first quarter maintenance has been widening the discount for heavy sour crudes. This is because refiners on the U.S. Gulf Coast where the bulk of the maintenance is occurring are major importers of heavy sour crudes from Venezuela and elsewhere. So, with several plants down this quarter or operating reduced rates, the lower demand is pushing heavy sour prices down.

Jason: He is our senior correspondent following all things refinery base, Nathan Risser. This is "Driving Discussions." Nathan, we normally have this focus on North American road fuels, but I want to touch briefly outside the U.S. for a moment. I know there's two refineries outside the States that are going to have some additions coming online later this year. I think one is in Nigeria. The other is in Mexico. How are U.S. refineries thinking about the effect of those additional barrels coming to market?

Nathan: So, so far, limited concerns. Valero said in its recent Earnings Call that it's expecting growing global refined products demand to effectively outpace these increases in refining capacity that are coming from, one, Nigeria's 650,000 barrel-a-day, Dangote Refinery, and, two, Mexico's 340,000 barrel-a-day from Olmeca Refinery. These two major refinery startups have been at the forefront of analysts' minds on Earnings Call over the past year, particularly in the environment we're currently in of refiner profitability where U.S. refiner margins are somewhat ebbing from their 2022 peaks.

One of the reasons though companies have limited concerns about these two refinery startups is how long it's going to take for them to reach full capacity. Dangote's owner, conveniently called Dangote Group, has previously suggested the plan would operate at about half of its maximum capacity initially. And for Olmeca, the most recent date for them is that they hope to reach full capacity by the end of March. There's also a lot of uncertainty about what kind of products they'll be producing at the start. And from speaking to refineries, it seems unlikely that finished-grade gasoline and other refined products will be happening very early on.

So, the reason this is relevant to U.S. refiners is there's concern that these additional barrels in the market could either displace or make U.S.-refined products barrels less competitive in the global marketplace. That could compress margins and lower profits for U.S. refiners. And, as I said, this comes at a time of already moderating margins. So, in the recent fourth-quarter, earnings results that have been reported over the last six to eight weeks, refiner profits and margins have taken a dip from the same three months in 2022. This is largely due to the monitoring from what was a boom year in 2022 when demand surged following the COVID-19 pandemic and when the war in Ukraine shifted trade flows specifically for diesel.

The other thing to talk about on the infrastructure side, more domestic to here in the U.S., is the planned expansion of Canada's Trans Mountain pipeline. So, when the expansion comes online, which is expected at some point in the second quarter, it's likely to increase the availability, demand, and also therefore the cost of Canadian heavy crudes, whose cheap prices have previously benefited U.S. refiners. So, a lot of refiners have been talking about this on Earnings Call, specifically the ones who process a lot of that Canadian heavy crude. There's some interest in how that's going to affect their operations. Are they going to switch crude slates if Canadian heavy gets too expensive?

Although, interestingly, HF Sinclair's chief executive last week made an interesting comment that he expects the price effect to be short-lived, which in his book is maybe about two years because the takeaway capacity from Canadian oil fields, which have been raising production recently, are likely to once again become constrained in that time period. So, we could end up back in a similar situation as we do today, where Canadian barrels have midstream and logistical constraints, and that keeps their price low. Still, though, HF Sinclair said on that call in line with other refiners and analysts that they expect that Canadian heavy differential to narrow going into the second quarter, if and when TMX expands. But given various insurgencies about when TMX is starting and what amount of crew they'll be able to ship from Canada's west coast, it's going to be a clear point of focus in the next four months for refiners and, like, coverage.

Jason: He's Nathan Risser, our senior correspondent. We're talking refinery turnaround season here on this edition of "Driving Discussions." Nathan, how about refinery investments domestically? Where are refiners spending the money and how much of that is going towards renewables?

Nathan: So, a very interesting shift has happened recently, where refiners have started talking more about spending money on domestic improvements. It very much counters this narrative of plant closures and declining investments in the U.S. refining industry that was much discussed throughout 2023. And so, some companies are unveiling plans for either domestic capacity expansions or what we call investments in debottlenecking existing operations. So, the big example of that recently has been Marathon Petroleum, who said they're going to spend about 1.2 billion on upgrades to two U.S. refineries. They're planning to build a 90,000 barrel-a-day distillate hydro treater at their 593,000 barrel-a-day Galveston Bay Refinery in Texas. That's for completion in 2027. And they're also looking to modernize their utility systems and do some emissions-reduction projects at their 363,000 barrel-a-day Los Angeles Refinery.

This comes at a time also where fears of refinery closures in the U.S. have also somewhat faded. The Louisiana State University Center for Energy Studies put out an interesting report last year saying that, basically, the worries of smaller Gulf Coast refineries closing have somewhat diminished as margins have remained wide, profitability looks strong, and U.S. refiners are expected to, especially on the Gulf Coast, increasingly be able to export refined products to the global market.

Their view is also very much in line with a recent refining outlook published by the consultant McKinsey. They forecast strong U.S. Gulf Coast refining margins under various crude demand scenarios all the way out to 2035. And they envision continued high throughputs as a result of growing product export markets, particularly from the Gulf Coast, that are likely to mitigate any declines in U.S. domestic demand for gasoline and diesel. And to put that in a global context, the consultants at McKinsey expect Asian and European refining margins to somewhat narrow in the future, partially due to new capacity coming online. But the U.S. is looking strong in their eyes.

So, one of the reasons why they have that view is U.S. refining FASC is still constrained. So, as everyone knows, as much as 1 million barrels-a-day of U.S. crude oil distillation capacity came offline permanently from January 2020 to about July 2022, according to EIA data, and that's created this linear U.S. refining system. That leaner U.S. refining system is operating at a time of demand that's returning to pre-COVID levels in 2019. So, HF Sinclair said on the recent Earnings Call that they're actually seeing refined products demand in the U.S. as being 5% to 6% above 2019 levels. The chief executive who made that comment during the call from HF Sinclair thinks that's going to lead to a supply-constrained environment for the rest of 2024 in the U.S. and the refining industry. And a result of that, he said, is that refiners are going to have to run plants at high rates to make up for that capacity shortfall. So, basically, a leaner U.S. refining system is going to have to run harder, run higher throughputs to make up for this resurgent domestic demand that has struggled under a million barrels-a-day refining closures over recent years.

And then just switching back to investments briefly, Philips 66 gave a timeline recently and announced that it will stop processing crude this month at its 150,000 barrel-a-day Rodeo Refinery in California as it completes a multi-year conversion to renewable diesel production. Elsewhere, Delek, a smaller U.S. refiner, announced this month that it's pursuing a carbon capture scheme at its 73,000 barrel-a-day big spring refinery in Texas. This is a project supported by a proposed nearly $100 million award from the U.S. Energy Department.

But, against all these, profitable refining and policy instability are still holding some refiners back from making a headlong push into renewables. An executive from Par Pacific, another smaller U.S. refiner, told delegates at Argus' Crude Conference earlier this year in Houston that he doesn't want to make one less barrel of conventional fuel with crack spreads where they are. And this is a sentiment many refiners are thinking, but few have been voicing. Other refiners on that same panel said they see a long runway for transitioning away from crude processing. Delek's executive vice president of operations said that transition is going to be a long process with conventional refining necessary for the coming decades. So, even for refiners who are looking at carbon capture or transition projects or renewable fuels projects, they are still forecasting significant petroleum refining product demand into the future.

Jason: Couple more minutes with our senior correspondent, Nathan Risser, here on "Driving Discussions." That's quite a lot that's gone on here in the first couple of months, Nathan. I guess, looking forward here, what are some of the big things you're looking out for throughout calendar year 2024?

Nathan: So, the first big thing is some potential assets in the industry that could be changing hands. One of them is U.S. independent refiner, Phillips 66, is considering selling some of its midstream assets and that's to satisfy a planned $3 billion of investments they're doing as part of ongoing cost-cutting measures that they announced in October last year. They said more recently that they're having, "Active discussions about selling their operated and non-operated midstream assets." So, it'd be interesting to see potentially this year who who picks up those assets that are for sale. Behind the scenes in that situation is activist investor, well, hedge fund Elliott Investment Management, who owns about $1 billion of Phillips 66's equity. They've been pushing Phillips 66 to focus more on their core refining business while cutting costs. They previously engaged with Marathon Petroleum on this same front.

And then, the other bigger item in terms of assets changing hands is the ongoing auction of CITGO's 805,000 barrels-a-day of refining capacity. Now, initial bids for those assets were made in January, but the sale, if successful, is not scheduled until later this year in July. So far, few companies look ready to buy what's nearly a million barrels-a-day of refining assets, but if the sale is successful, it will be the largest sale of year's refining capacity since Andeavor's acquisition by Marathon Petroleum back in 2018. PBF, the refiner, their chief executive summed up the auction quite well last year by calling it a quagmire. And a couple of the refiners have basically said they're not interested. That's what Marathon said in Earning Calls last year. Valero and HF Sinclair said, you know, they'll take a look at the assets as, you know, many refiners will do, but no one so far has indicated any interest or likelihood in bidding for them.

This comes at a tough time basically to sell U.S. refining assets. So, the last major asset that was up for sale was LyondellBasell's $254,000 barrel-a-day Houston, Texas Refinery. And the sale of that actually failed. People looked at it. No one was interested. It required quite a significant amount of investment in the eyes of any interested refiners. Now, the CITGO assets are considered higher quality, but it's just overall a fairly poor environment to buy nearly a million barrels-a-day of refining capacity, despite what is a noticeably good margin environment. And as I've said before, refiners are appearing more interested in debottlenecking their operations such as the ones mentioned earlier for Marathon at Galveston Bay in Los Angeles rather than buying big chunks of assets. So, that's a big piece of news when the sale concludes, whether anyone has bid for it, whether anyone's going to buy it, or if the sale fails, what's going to happen next? Because there are certainly a lot of U.S. refiners waiting in the wings who'd be very interested in seeing those assets parceled up and cherry-picking specific refineries or midstream assets or retail assets that would be more complementary to their portfolio.

Then just quickly, the other thing I'll be looking as we go into driving season is demand levels specifically for gasoline. There's this ongoing discussion about how much-increased efficiency in vehicles, internal combustion engines, and the growth of EV vehicles in the market, how much that is eroding petroleum gasoline demand. So, when the data starts coming out in the summer for demand levels, it'll be interesting to see how that compares to previous years and whether we're actually kind of turning this corner and gasoline is potentially, significantly, stunted to the past and whether would then be unlikely to return to those same gasoline demand levels ever again.

Jason: So, there is quite a lot on his plate, ladies and gentlemen, but he's not our senior correspondent for nothing. Nathan, thank you so much, my friend, and let's check in with you halftime of 2024 and see how things are shaping up.

Nathan: Sounds good, we'll speak soon.

Jason: All right, there he goes, our senior correspondent, covering all things refineries, stateside, and worldwide on occasion, Nathan Risser. We thank Nathan for spending a few moments with us. And with that, we'll conclude another edition of "Driving Discussions," a production of Argus Media, leading independent provider of commodity pricing information. This reminder to check out the previous episodes in our series, and for the latest and greatest in all things Argus coverage of U.S. products, make sure you go to argusmedia.com/us-products.