An oft-repeated mantra from industry is that the U.S. has not built a new oil refinery since the 1970s. Technically that’s true, but it ignores the fact that we had an too much refinery capacity through the 1980s (when many were shut down) and that capacity creeps up as much as two or three percent a year due to expansions and upgrades.
Pilings being driven into the ground for foundations for an expansion project at the Motiva refinery in Port Arthur, Texas. (Steve Ueckert / Chronicle)
Moody’s believes refining margins may have peaked and that the rising pace of capacity additions worldwide will considerably increase margin risk beginning in 2009 and 2010, particularly to the degree that demand for refined products slows. By 2010, mid-cycle margins risk falling somewhere between pre-2000 levels, when margins generally averaged less than $3/barrel, and the far higher 2003-2007 average of approximately $9/barrel.
Some projects will get cancelled, no doubt, but….
Moody’s does not believe the capacity expansions will lead to the surplus capacity experienced in the 1980s and 1990s. While margins are expected to narrow, margin pressure is expected to be mitigated to a degree by the cancellation, downsizing, and delay of many projects. Nevertheless, even factoring in the likelihood of cancellations and delays, Moody’s believes that a majority of the planned refining capacity will be implemented, pressuring refining margins and cash flows.
True, the margins will be squeezed tightest in Asia, Moody’s says, but U.S. refiners should savor these good times while they can. Oops, too late.