The imminent startup of a new crude distillation unit (CDU) at ExxonMobil's Beaumont, Texas, refinery is likely to put downward pressure on Gulf coast refined product prices, but may have little effect on crude availability.
The Beaumont Light Atmospheric Distillation Expansion (Blade) project adds 250,000 b/d of light crude refining capacity to ExxonMobil's 370,000 b/d refinery in Beaumont, about 80 miles east of Houston. With the addition, Beaumont's capacity would approach the scale of Motiva's 626,000 b/d refinery in Port Arthur, Texas, the largest in the US.
By adding a third crude unit to the refinery, ExxonMobil intends to increase its diesel output and take advantage of crude produced by the company's upstream operations in the Permian basin of west Texas and eastern New Mexico.
Increased diesel output from Beaumont could lower prices on the Gulf coast, but given Exxon's intention to use more Permian crude feedstock — a light grade more suited to producing gasoline and naphtha — the overall impact on diesel prices could be lower-than-expected, according to refined products traders.
The Beaumont expansion also could provide some relief to tight US Gulf coast vacuum gas oil (VGO) markets. The Gulf coast has traditionally relied on European imports of VGO — a feedstock that refineries upgrade to gasoline and diesel. Russian VGO comprised over half of these European imports in the months leading up to the April 2022 US ban on oil and refined products from Russia.
After the EU imposed sanctions on Russian refined products, effective last month, European refiners were further incentivized to keep VGO on the continent, leading to a net shortage of the feedstock in the US Gulf coast. Combined with elevated freight rates, the sanctions will likely result in lower-than-normal shipments of VGO to the Gulf coast in the second quarter, according to products traders.
The startup of Beaumont's new CDU could add much-needed VGO volumes to the Gulf coast and cap prices, at least in the near term, after prices rose in the first quarter on heavier-than-expected spring refinery maintenance.
But increased naphtha supply from Beaumont could exacerbate an already over-supplied US Gulf coast market, products traders said. Prices for naphtha — a gasoline blendstock and petrochemical feedstock — are linked to gasoline values. If the Beaumont expansion supplies the Gulf coast with more naphtha and gasoline, prices for both refined products could fall.
ExxonMobil's new Beaumont unit will likely be supplied by WTI crude from the Houston-area market, but Gulf coast crude may nevertheless remain plentiful as increased supply volumes are already being observed for the current trade month. WTI deliveries to the Magellan East Houston (MEH) terminal so far in the April trade month have climbed to approximately 639,000 b/d, up by more than 40pc from the prior month and a 48pc increase from the same time last year.
Permian crude could be delivered to Beaumont via the MEH terminal to the Zydeco pipeline, which runs between Texas and Louisiana.
While the Blade project was built to increase ExxonMobil's refining capacity for light Permian crudes produced by the company's upstream division, other Gulf coast refiners have been expanding capacity to process heavy Canadian crudes to capture favorable discounts and boost margins.
New capacity outweighs closure
Multiple refinery closures since the start of the Covid-19 pandemic have tightened US refined product markets, and relief depends on a small number of in-progress and proposed projects.
ExxonMobil's Blade project is not the only new capacity starting up along the US Gulf coast, but the pending closure of a 265,000 b/d Texas refinery and large-scale global projects threaten to further shift activity away from the US, the largest refining country.
US independent refiner Marathon is adding 40,000 b/d of crude refining capacity and 17,000 b/d of residual fuel oil upgrading capacity to its 593,000 b/d Galveston Bay, Texas refinery. Marathon expects to start the units in April and process significantly more heavy Canadian crude, the company said in December.
Valero is building a new coker at its 335,000 b/d Port Arthur, Texas, refinery that will add 55,000 b/d of capacity. Like Marathon's project, Valero intends to take advantage of discounts on heavy sour crude and fuel oil grades.
With heavy Canadian crude grades trading at a discount, a move to refine more of the cheaper product could have a greater impact on margins than the investment ExxonMobil has made to increase light Permian crude processing.
But more than two-thirds of this year's planned Gulf coast capacity expansions will be offset by LyondellBasell's plan to close its 265,000 b/d Houston refinery by the end of the year. LyondellBasell has not decided whether to run the refinery at normal rates until 31 December or gradually reduce throughputs during the year.
Outside of the Gulf coast, appetite for US refining capacity expansion is limited. Independent refiner CVR Energy's chief executive said in a February earnings call that the company has little desire to invest in refineries, "certainly not on new capacity." Phllips 66 chief executive Mark Lashier echoed the sentiment in an interview with Argus the same month.
Doubts also abound about whether proposed greenfield refining projects in the US will be completed.
Outside of the Exxon, Marathon and Valero expansions, there is approximately 417,000 b/d of proposed new US capacity — largely in Texas and the Rocky Mountains region. But energy consultancy IRR Energy expects the projects to have a low probability of completion.
Even if the 417,000 b/d of planned US capacity comes online, it pales in comparison to the 1.8mn b/d of projects in Mexico, Nigeria and the Middle East — all of which are under construction or in final commissioning stages with expected startups in 2023 and 2024.
Still, the US refining sector remains bullish on the country's future as the world's largest refining hub.
"The US will be a refining powerhouse because of the cost position here and the access to advantaged crudes and a strong export capability," Lashier said.
