Wednesday, September 28, 2011

Why Conoco and Sunoco Couldn't Make a Go of It

Energy analyst John Kemp explains why Sunoco and Conoco have had such a hard time turning profit at their Philadelphia, Marcus Hook and Trainer refineries. It has to do with the old plants' inability to handle any product other than expensive "sweet, light" crude.

Because of the expense of buying it, profit margins are much thinner. In the midwest and elsewhere, plants can handle heavier crude that requires more refining. Plus the oil they get, from Canada and elsewhere is less easy and more expensive to export.

Writes Kemp:
The best way to understand why Marcus Hook and Philadelphia are such terrible assets to own is to look at a snapshot of the crudes they were processing in June (the latest month for which detailed data is available) compared with other refiners across the country.

In June, the United States imported 285.9 million barrels of crude oil. The weighted average sulphur content was 1.71 percent while the average API gravity was 28.34 degrees, according to company-level data published by the Energy Information Administration, the statistical arm of the U.S. Department of Energy.
Given the scarcity of high quality crudes with low sulphur content and high yield of premium products, as a result of the war in Libya and North Sea maintenance, most refiners focused on acquiring the cheapest and sourest oils their refineries could handle to maximise margins.

But struggling Sunoco imported 4.95 million barrels for Marcus Hook with an average sulphur content of just 0.17 percent and API of 36.8 degrees, much sweeter and lighter crude than other refiners. It also brought in 8.96 million barrels for Philadelphia with an average sulphur content of 0.18 percent and an API of 33.42.
Unable to reduce the sulphur content or crack heavier molecules more aggressively to wring more valuable light products from its crude, Sunoco's buyers were forced to chase some of the most expensive crudes in the market.
There are other reasons but those seem to be the most salient.

Interestingly, Joel Kotkin writes in Forbes that when it comes to where America's best jobs will be coming from in the future, they're in oil, gas and coal. When it comes to job growth over the last five years...
... the biggest growth by far has taken place in the mining, oil and natural gas industries, where jobs expanded by 60%, creating a total of 500,000 new jobs. While that number is not as large as those generated by health care or education, the quality of these jobs are far higher. The average job in conventional energy pays about $100,000 annually — about $20,000 more than finance or professional services pay. The wages are more than twice as high as those in either health or education.

Nor is this expansion showing signs of slowing down. Contrary to expectations pushed by “peak oil” enthusiasts, overall U.S. oil production has grown by 10% since 2008; the import share of U.S. oil consumption has dropped to 47% from 60% in 2005.  Over the next year, according to one recent industry-funded study, oil and gas could create an additional 1.5 million new jobs.
So how ironic is it that one of America's greatest growth industries is failing in our own back yard? Very. But it helps to know why.


Anonymous Anonymous said...

So, it's easier to close the refineries than to upgrade them to process the heavier crude? How can it be less expensive to abandon billion dollar facilities than to upgrade them? If there is a tax advantage, that needs to be looked at....
I would submit that history has shown that abandonment of similar facilities left behind horribly polluted sites that we the people end up paying to clean up and restore, while the companies go elsewhere and start another mess.
Maybe we should demand that they dismantle and restore the site if it is to be shut down.

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