http://www.washingtonpost.com/wp-dyn/content/article/2007/06/21/AR2007062102122.html?referrer=email The Ripple Effect Of Refinery Fires
Production Breakdowns Push Gas Costs Higher Across Industry
By Steven Mufson
Washington Post Staff Writer
Friday, June 22, 2007; D01
In February, fire broke out at a 74-year-old oil refinery in the heart of the Texas Panhandle.
At about 2 o'clock on a Friday afternoon, liquid propane escaped from storage tanks, formed a vapor cloud and ignited. Within minutes, buttresses that held pipes 25 to 30 feet above the ground collapsed, spilling more fuel on the fire. Three 1-ton cylinders of toxic chlorine gas were damaged. A dozen people were injured, one critically....The accident also put a dent in the nation's gasoline supplies. It was the fourth fire at a Valero Energy oil refinery this year and one of a dozen to have hit U.S. refineries since Jan. 1....The rash of fires and other breakdowns, known euphemistically in the industry as "unplanned outages," helps explain why motor-fuel prices have soared 36 percent this year. With the U.S. oil refinery industry already stretched thin, breakdowns and maintenance shutdowns have drained gasoline inventories just when the nation's refiners would usually be ramping up for the summer driving season...."When these facilities have one of these catastrophic events, it can have a disproportionate effect on the gasoline market," said Carolyn W. Merritt, chairman of the Chemical Safety and Hazard Investigation Board. Lynn Westfall, chief economist and vice president for strategic planning for Tesoro, an independent refiner, said that because "we're operating on such a razor-thin margin, we're always one refinery incident away from a spike in prices."
The amount that consumers paid to refine a gallon of gas more than tripled between January and May, according to the Energy Information Administration. In the past couple of weeks, a wave of gasoline imports has boosted inventories and eased prices slightly, putting the national average at about $3 a gallon. Yet gasoline inventories are still 10.6 million barrels, or 5 percent, below comparable levels a year ago, said Eitan Bernstein, oil analyst with Friedman, Billings, Ramsey Group.
Peter K. Ashton, president of Innovation & Information Consultants, which specializes in analyzing the petroleum industry, said inventories are near the minimum level for smooth operation of the entire distribution system. "The system itself is moving closer and closer to the breaking point, such that any little hiccup in terms of a supply curtailment, even one that lasts only a couple of days, can cause precipitous price spikes," Ashton said. "This was not the case prior to the year 2000, when the companies carried larger inventories."...."I don't understand how an industry that makes tens of billions per year can still have rusty refining plants that constantly break down," Schumer said. "And I don't know any other industry where an equipment breakdown in one company benefits every other company by raising prices."
Profits are certainly soaring, not only for exploration and production firms that benefit from high crude oil prices but also in the refining business, where the crude is turned into such products as gasoline, heating oil and naphtha. Bernstein estimates that profit margins for refining hit $28.75 a barrel at the end of May, far beyond traditional levels.
In the 1980s, refineries operated at 78 percent of capacity, on average. Profit margins were small and competition was stiff. Unions were strong, and small, independent refiners ran tiny units known as "tea kettles" to take advantage of regulations favoring them.
..........................................
Companies also trimmed inventories, thus saving by not tying up the money it takes to buy extra oil, while consumption grew. Gasoline stocks are now enough to cover 21.1 days of typical consumption; in the early 1980s they were enough to cover about 40 days. (The Strategic Petroleum Reserve holds only crude oil, which does not alleviate the refining crunch.) The industry complains that the Clean Air Act and other environmental regulations have forced refiners to spend on expensive upgrades to slash sulfur dioxide and nitrogen oxide emissions. The American Petroleum Institute said environmental upgrades cost billions of dollars. Refinery expansions lagged. With an end to oil price controls that had helped small, inefficient refineries, many of the tea kettles closed down.
Though a new refinery has not been built for 30 years, capacity expansions at existing refineries have amounted to the equivalent of 10 new refineries over the past 10 years, according to API. But capital investments in refineries are expected to total 6 percent of the investments in U.S. exploration in 2007, according to the Oil & Gas Journal. And several refinery expansion projects have been shelved recently because of rising costs.
Now U.S. refineries routinely operate at more than 90 percent of capacity and still cannot satisfy the needs of American motorists. The United States imports 13 percent of its gasoline supply from 43 countries, said Westfall, the Tesoro executive. The stepped-up use rates help explain this year's breakdowns and long maintenance shutdowns, oil analysts said. The breakdowns result from pushing refineries too hard, some industry executives say. After hurricanes damaged some refineries in late 2005, that meant other refineries had to work extra hard.
That also led to longer maintenance shutdowns, Westfall said. Gheit adds that the explosion at BP's Texas City, Tex., refinery, which killed 15 people in March 2005, also lengthened maintenance times because all companies wanted to be more careful. "It is like slowing down on the highway after seeing an accident," Gheit said. "It is taking longer for refineries to come back from typical regular maintenance because the accident with BP put everyone on guard."
A shortage of skilled workers is another factor. A report from the Chemical Safety and Hazard Investigation Board on BP's 2005 explosion showed that the refinery's staff was overworked and undertrained. Valero's chairman has complained to analysts that he was having trouble hiring good engineers. He was not only competing with lucrative jobs in places like Saudi Arabia; nowadays, engineers can earn about $300,000 on tar sands projects in Canada, where as Gheit says, people speak English, can buy a beer and watch football on television.
Now, oil companies say they are hesitant to build more refineries because of potential competition from biofuels, with which President Bush wants to replace 20 percent of the nation's petroleum-based motor fuel. Tillerson said: "When we do the numbers, you don't need another refinery. If these biofuels objectives are to be met, and they're mandated to be met, to build another refinery would be a very risky proposition."
EXCELLENT SUMMARY OF THE STATE WE ARE IN
Printer-friendly format
Email this thread to a friend
Bookmark this thread
(1000+ posts)
Send PM |
Profile |
Ignore
