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US' Marathon Petroleum to trim Q3 refinery runs as turnarounds increase

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Marathon Petroleum will run at 94% capacity in the third quarter, down from 100% refinery utilization seen in Q2, because of more Q3 turnarounds at its 13 refineries, company executives said in their second-quarter results call Aug. 2.

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But positive market conditions for refiners that allowed Marathon Petroleum, the largest US refinery owner, to post $7.76 billion in refining earnings in Q2 are not expected to change materially in Q3.

"Looking forward, we expect tight supply, low inventory levels, and strong global demand to continue incentivizing high refining runs" in [Q3], Marathon CEO Brian Hennigan said on the call. In Q3, Marathon expects crude throughput to fall to 2.71 million b/d from the 2.9 million b/d seen in Q2 as turnarounds increase.

More turnarounds planned

Planned turnaround activity in the second half of 2022 will be heavier than H1 as the company seeks to maximize its turnaround schedules and level spending as much as possible, according to Ray Brooks, Marathon's long-time head of refining, who will be retiring in September.

Marathon, like many of its peers, delayed and shifted turnaround schedules at its refineries as it tried to minimize the impact of the coronavirus pandemic on its employees in 2020 and 2021. "So when we look at '22 and '23 and '24, we're looking at optimizing that [turnaround schedules] and trying to level that ... across a period of time," Brooks said on the Q2 call.

Marathon expects turnaround costs to average $400 million in Q3, of which $160 million will be allocated to its two large US Gulf Coast refineries—the 593,000 b/d Galveston Bay, Texas, refinery and the 585,000 b/d Garyville, Louisiana, plant—which processed a record 1.35 million b/d in Q2.

Total Q3 operating costs are estimated to average $5.50/b from $5.19/b in Q2 because of the higher cost of natural gas, which represents about 15%, or about 30 cents/b, of Marathon's operating costs.

Marathon also expects its 40,000 b/d crude expansion project—the South Texas Asset Repositioning program—at the Galveston Bay, Texas, refinery to be complete and online in early 2023.

Demand speed bump

Marathon is also benefiting from wider differentials between light and heavy crudes, in part because of early releases from the Strategic Petroleum Release, which "put significant pressure on medium sours" and has increased the discount Canadian West Canada Select holds to WTI as "WCS needs to clear the Gulf Coast," Rick Hessling, Marathon's head of feedstocks, said on the Q2 call.

"We have historical space out of Canada, and we are able to take advantage of that in all three regions," he said, referring to the ability of the company's operations along the USGC, the US Midwest, and the US West Coast to access cheaper heavy Canadian crudes.

So far in Q3, WCS is holding a $24.63/b discount to WTI Cushing, according to Platts assessments, compared with an $18.45/b discount in Q2.

Demand for refined products remains strong, despite "a bit of a speedbump" in early July, said Hessling, where demand fell slightly below Marathon's expectations.

"Ever since then, though, we've seen week-on-week increases and demand is picking up really across the board, but specifically in gasoline, with diesel steady," Hessling said, adding jet demand is up 20% quarter-on-quarter.

"And we're getting very strong indicators from the airlines and the travel industry on domestic travel via jet," he said.

However, despite increased market volatility seen in the last two to four weeks, Marathon has a positive take on Q3 market conditions.

"Fundamentally, if you look at where inventories are across the energy sector, they're either at or below five-year averages. We're getting good demand signals from the consumer. And we're seeing really solid feedstock differentials," said Hessling.

"We're seeing a Brent[-WTI] spread that's $7/b to $10/b. We're seeing [WTI] backwardation that is only plus or minus $1[/b]. So I would tell you, from a macro perspective, I think there's upside from here, but I'll pause there and be careful because it's a very volatile market. Oftentimes, markets go too high and then they correct and go too low," he added.

On the renewables front, Marathon's planned renewables conversion of its Martinez, California, refinery is awaiting an air operating permit from the Bay Area Air Quality Management District. The permitting process is currently in the public comment period, which ends Aug. 21.

"Getting the air permit will be a big deal. That will allow it to start up when it is ready, and it allows us to close our joint venture partnership with Neste. So we see the light at the end of the tunnel," said Ray Brooks.

The plant is expected to be mechanically complete by the end of 2022 and be able to produce 50,000 b/d of renewable diesel when it starts up.