Marathon Petroleum lowers fourth quarter run rates as it shifts to lighter crude slate

New York — Marathon Petroleum will cut refinery run rates in the fourth quarter as it grapples with higher costs and weak demand resulting from the coronavirus pandemic, CEO Mike Hennigan said on Nov. 2.

"The challenges created by COVID continued through the third quarter," he said on the company's third quarter results call. "Despite some recovery, global demand for our products and services remains significantly below historical levels, which continues to pressure profitability for both our company and the industry."

Marathon expects to process 2.265 million b/d of crude in the fourth quarter through its US refining system, with US Gulf Coast, Midwest and the USGC plants to run 950,000 b/d, 940,000 b/d and 375,000 b/d, respectively.

This is lower than the third quarter's 2.390 million b/d, where the USGC, Midwest and USWC ran 962,000 b/d, 1.024 million b/d and 404,000 b/d, respectively, putting total system utilization at 84%.

Marathon has two turnarounds planned for the quarter – at its 291,000 b/d Catlettsburg, Kentucky, plant and its 131,000 b/d El Paso, Texas, plant. No further details were given.

However, as refiners lower throughput, fixed refinery costs remain static, thus increasing operating costs per barrel. Fourth quarter operating expenses over Marathon's system are expected to be $5.50/b compared with the third quarter's $5.41/b.

Wider margins, lighter crude slate

Marathon also expects to run a lighter crude slate, particularly at its USGC plants, where 46% of crude run will be light sweet in the fourth quarter, compared with the 35% in the third.

"When you look at crude avails, we've significantly shifted to light sweet," said Marathon's head of crude supply, Rick Hessling, on the call.

Despite an improvement in crack spreads, margins in all regions remained under pressure as crude differentials narrowed considerably compared to the second quarters. However, as differentials widen between sweet and sour crude grades in the fourth quarter, margins are rising, helping mitigate higher operating costs.

USGC refining cracking margins for light, sweet WTI MEH are averaging $5.60/b so far in the fourth quarter, while cracking margins for medium sour Mars are averaging $3.42/b, according to data from S&P Global Platts Analytics. This compares with $5.08/b and $2.42/b, for WTI MEH and Mars, respectively, in the third quarter.

Going forward, Marathon expects to increase its use of medium sours as more US Gulf of Mexico crudes come back on the market after several hurricanes shut in production of key Eastern Gulf fields.

"We have come off a very, very disruptive storm season, and we're starting to see some signs of medium sours getting back to normal," Hessling said. "And then we're seeing a little bit of a glimmer of hope from the Canadian side when you look at the mandate that's been lifted."

Increased medium Gulf of Mexico sours have started to widen the gap between light, sweet barrels and more sour barrels.

WTI MEH is holding a 20 cent/b premium to Mars so far in the fourth quarter, compared with the 23 cent/b discount seen in the third, according to Platts assessments.

Faster rationalization and the move toward renewables

Weakened demand from the coronavirus pandemic is laying bare excess refining capacity across the globe, which has refiners examining assets for worthiness.

"One of the things that I think is occurring with COVID it is forcing rationalization in this industry on a faster pace that would normally be occurring in a downward cycle," Hennigan said.

Just under 1 million b/d of US refining capacity has been idled or is scheduled to idled, according to estimates by S&P Global Platts based on company and regulator data.

Marathon was the first US refiner to idle refinery capacity after coronavirus lockdowns. It shut in the midst of the pandemic its 26,000 b/d Gallup, New Mexico, plant and its 161,000 b/d Martinez, California, plant now earmarked to become a renewables plant.

Marathon is also in the process of starting up its renewables plant in Dickinson, North Dakota, which will be able to produce 12,000 b/d of renewable diesel by the first quarter of 2021 which will be railed to the USWC to take advantage of the California Low Carbon Fuel Standard credits on top of federal blender credits and mitigation of the company's RINs expense.

Marathon applied for the permits to reconfigure Martinez from a crude oil processing facility to a renewables facility in October. It also has submitted the initial study for the environmental impact statement report, completed the feasibility engineer and moved on to more detailed engineering plans, said Ray Brooks, Marathon's executive vice president of refining.

"We're excited about Martinez from the standpoint that we have a facility with three hydroprocessing units, two hydrogen plants and an extensive infrastructure that gives us a very capital-efficient project," he said.

The plant is expected to be start producing renewable diesel in 2022 and reach full capacity of 48,000 b/d in 2023