New refineries could help ease the backup created by increasing U.S. crude production, but significant economic and political barriers discourage the industry from building the facilities.
“The pure economics of trying to build a refinery just doesn’t make any sense,” said Bruce Bullock, director of Southern Methodist University’s Maguire Energy Institute, at a breakfast panel last week in Houston.
“Refining has only returned its cost of capital three years out of the last 15,” Bullock said.
He said refineries are considered profitable only when they earn enough to cover their cost of capital, typically about a 10 percent to 15 percent return, on top of operating costs.
Beyond the economics, finding a suitable location can be difficult, said Bernard “Bud” Weinstein, the institute’s associate director.
“It’s the whole not-in-my-backyard phenomenon,” Weinstein said. “The challenge is finding a place where the community is accepting and you meet all the refinery standards. It probably is easier in Texas or Louisiana, where you have a 100-year history of refining, than in New Jersey or Massachusetts.”
Booming production in new plays, including the Bakken Shale in North Dakota, has led to record storage at Cushing, Okla., one of the major hubs for crude oil.
Crude oil production increased almost 14 percent in the last year alone, according to the American Petroleum Institute. But domestic demand is dropping and U.S. crude cannot be shipped to foreign refineries because of an export ban.
While pipeline companies have been expanding storage and transportation facilities, Weinstein said new refineries are the best way long-term to deal with all the oil.
“The ultimate solution to Cushing is to build more refining capacity,” Weinstein said, noting that there has not been a major new refinery built in the United States since the 1960s.
But in addition to the financial concerns and the possibility of community resistance, Weinstein listed local, state and federal regulatory requirements that new refineries must meet in order to operate.
They include rules on air emissions, water quality and use of biofuels.
Facing such obstacles, some refiners have opted to expand existing facilities rather than build new ones.
Royal Dutch Shell and Saudi Aramco completed an expansion last year of their Port Arthur refinery, which is now the nation’s largest.
The facility, called Motiva Port Arthur, more than doubled in capacity, from 275,000 to 600,000 barrels per day.
It has faced partial disruptions because of damaged equipment, but is expected to run at full capacity this year.
And Minnesota-based CHS announced earlier this month that it will increase refining capacity of its National Cooperative Refinery Association facility in McPherson, Kan., by 18 percent, to 100,000 barrels per day.
Some companies, however, are looking into building smaller facilities near the new plays, hoping to capitalize on the lack of infrastructure to move crude to the larger refineries.
North Dakota-based energy services company MDU Resources Group is seeking final approval for a small diesel refinery that could process 20,000 barrels a day of Bakken crude oil.
But Weinstein noted that such refineries will process only small amounts of crude for regional use, which will not solve the issue of the Cushing glut.
“They have to be large in order to bring the unit cost down to the point that the refinery can be economically viable,” Weinstein said.