US refiners slip into the red
Covid-19 demand destruction brings shut-ins and severe financial losses to the once-booming sector
The coronavirus has accelerated another wave of closures, consolidations and conversions in the US oil refining industry, after a decade of sky-high profits and growth.
Plateauing fuel consumption, tighter environmental regulations and increased overseas competition—especially a number of mega-refining projects, primarily in China and the Middle East, slated to come online between 2021-24—were expected to negatively impact the US industry later this decade. But a sea of red ink in recent quarters, courtesy of the collapse in global petroleum product consumption and refining margins, has brought the timetable forward.
In terms of closures, European major Shell will begin shuttering its Convent refinery in Louisiana in mid-November as it continues to search for a buyer. The operator is also attempting to sell its refineries at Puget Sound in Washington state and Saraland in Alabama. Shell completed the sale of its Martinez refinery in the San Francisco area to US refiner PBF Energy earlier this year, but it may be hard-pressed to find buyers for these other refineries given several recent closures in the US.
The five largest independent oil refiners in the US took it in the teeth in the third quarter
In August, Marathon Petroleum and Phillips 66—the first- and third-largest independent refiners in the US by throughput capacity—announced plant closures. Marathon is idling indefinitely its Martinez and Gallup facilities in California and New Mexico, respectively. Phillips 66 announced plans to shut its Rodeo carbon plant and Santa Maria refinery, both in California.
On the consolidation front, PBF Energy is further streamlining its East Coast operations after shuttering its Philadelphia Energy Solutions refinery in 2019. During its third-quarter earnings call, the company announced plans to idle a number of units at its Paulsboro refinery in New Jersey to allow it to run the remaining units more economically in conjunction with its Delaware City refinery.
Finally, several companies are converting oil refineries to renewable diesel plants, or at least considering doing so, to significantly bolster margins by selling into the California market. This will allow them to obtain credits under the state’s Low Carbon Fuel Standard and sell rather than purchase compliance credits under the federal government’s Renewable Fuel Standard.
Phillips 66 is planning to turn its Rodeo, California refinery into the “world’s largest renewable fuels plant”—mostly renewable diesel—while Marathon is planning to convert its refinery in Dickinson, North Dakota and fellow refiner HollyFrontier its refinery in Cheyenne, Wyoming into renewable diesel plants.
Tough third quarter
Overall, the five largest independent oil refiners in the US took it in the teeth in the third quarter, losing a combined $2.55bn on an operating basis, albeit with HollyFrontier contributing only a modest $2mn loss (see Fig. 1). This compares to a combined profit of $560mn in the second quarter of 2020 and $2.75bn in the third quarter of last year.
$2.55bn – Combined Q3 loss of top five US refiners
The refining segments of the five independents were especially hard hit in the third quarter. A 7pc rebound in total throughput compared with the second quarter, to 8.31mn bl/d, failed to make up for refining margins falling further through the floor. Despite the loosening of Covid-19 related lockdowns in the US, oil product consumption remained muted, reflected in total throughput in the third quarter still almost a fifth below the same period of 2019.
Unlike the first quarter, when the major US independents took a massive $18.66bn in non-cash charges for special items, Phillips 66 was the only company to take a significant charge in the third quarter. According to the company, most of its $798mn charge was related to the planned conversion of its San Francisco refinery into a renewable fuels plant.