US Refinery Scorecard: US refiners find strategies to adapt to lower demand

New York — Almost 10% of US refining capacity is offline due to low demand, plant repurposing, or extended turnarounds and many US refiners feel that is still not enough to support refining margins.

According to estimates from S&P Global Platts, about 1.69 million b/d of refinery capacity is offline now or will be shortly as refiners wrestle with weak gasoline, diesel and jet demand compounded by the second wave of the coronavirus.

"One of the things that I think is occurring with COVID is that it is forcing rationalization in this industry at a faster pace than would normally be occurring in a downward cycle," said Marathon Petroleum's CEO Mike Hennigan on the Nov. 2 third quarter results call.

Some of this capacity is shut permanently – such as Marathon's 27,000 b/d Gallup, New Mexico plant – one of the first plants shut in the wake of cratering demand.

Some will be repurposed – HollyFrontier ran its last barrel of crude through its 48,000 Cheyenne, Wyoming, refinery in August as it prepares to turn the plant into a renewable diesel facility.

Some are running at partial capacity. PBF Energy shut a crude unit, coker and fluid catalytic cracking unit down at its Paulsboro, New Jersey, plant, taking 85,000 b/d of crude processing capacity offline and sending unfinished feedstock to its nearby Delaware City, Delaware plant for finishing in an effort to increase its US Atlantic Coast system rates.

And others have pushed forward planned work on their plants.

Phillips 66 shut its 255,600 b/d Alliance refinery in Belle Chasse, Louisiana, on Sep. 13 for Hurricane Sally and elected to accelerate planned work on the plant, with an eye to restart in 2021 "if economic," according to Robert Herman, Phillip 66's head of refining on the Oct. 30 results call.

Lower Q4 run rates expected

Like many of their peers, Marathon Petroleum and Valero Energy – the two largest US refiners – have plans to run their refineries at lower rates in the fourth quarter than they did in the third.

Marathon expects to run 2.265 million b/d of crude in its refineries in the fourth quarter, compared with the 2.390 million b/d it processed in the third when it ran at 84% of capacity.

Marathon has already reduced its operable refining capacity with the shutdown of the Gallup, New Mexico, plant and plans to repurpose its Martinez, California, plant to make renewable diesel plant.

Valero expects to keep fourth quarter runs lower than those in the third, expecting to process 2.48 million b/d compared with the third quarter's 2.526 million b/d.

Some refiners like PBF did not break out by region as usual anticipated fourth quarter refinery utilization, instead telling analysts it plans to run between 700,000 b/d and 800,000 b/d through its system ahead of the partial shutdown of its Paulsboro plant at the end of 2020. PBF processed 706,000 b/d in the third quarter or about 70% utilization.

"We are seeing very few signals which would necessitate increased utilization rates," said PBF's CEO Tom Nimbley on the Oct. 29 results call.

And other refiners declined to give any guidance.

"In refining, crude utilization will be adjusted for market conditions," said Phillips 66's Kevin Mitchell, chief financial officer. In the third quarter, Phillips 66's global refining system ran at 77% of capacity.

How much more rationalization

Most US refiners agree that more rationalization is in the cards.

"We've been tracking announced refinery closures. And in fact, we've had to revise it 3 times this week," said Phillips 66's Jeff Dietert on the Oct. 30 call.

"I think we're up to almost 2 million b/d of announced closures globally. There's another 700,000 b/d of temporary closures and then another 700,000 b/d of refineries that have talked about potential of converting into terminals or other activities. So 3 million to 3.5 million barrels a day globally," he said.

Since then, Shell announced on Nov. 5 its Convent, Louisiana, plant will be shut down mid-November as the parent company moves towards cleaner fuels and manufacturing integration, opting instead to keep the chemical and refining Norco, Louisiana, complex running.

PBF's Nimbley thinks that there is about 1-1.5 million b/d more of refinery closures needed in the US to get back to optimum, including some of the smaller US Gulf Coast plants.

Prior to the decision to shut down completely their plants, refiners looking to stave off total shutdown instead idled selected units in hopes that when demand picks up, they can return to normal.

Delek US is only running the reformer and alkylation unit at its 80,000 b/d Krotz Springs, Louisiana, plant, allowing it to capture the octane spread as it begins planned work in November, the company said on the Nov. 5 third quarter results call.

If operating conditions return to normal in February or March of 2021, Delek US said it will consider restarting the units shut down for turnaround work which include the crude unit and the fluid catalytic cracking unit.

On the US West Coast, Par Pacific Petroleum is running only East part of its Hawaii refinery, just to supply local weaker demand as the island tourist traffic has been decimated by the lack of travel.

But things could get worse before they get better. A 69% rise in new coronavirus cases in the US over the past 14-days could likely trigger more lockdowns, countering any tightening inventories of gasoline and diesel and the Pfizer-injected optimism around a coronavirus vaccine which boosted oil prices.

US gasoline demand has been "relatively stagnant", said analyst Alan Struth Nov. 12 on S&P Global Platts Analytics weekly coronavirus webinar, but it could be "under review with new lockdowns".

Platts Analytics does not see the US return to 2019 oil demand levels until 2022, with 2020 levels down 2.4 million b/d or 12% versus 2019. Expectations are for 2021 levels to rise by 1.8 million b/d or 10%.