US$100/bbl Oil Here to Stay, Won’t Overpay for U.S. Refining Assets
If drastic changes are not made to the U.S. economy, people may soon be dreaming of the days when oil was $100/bbl, Petroplus Chairman Thomas O’Malley said recently during Hart’s World Refining & Fuels Conference in San Diego, California.
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| Thomas O’Malley Petroplus Chairman |
O’Malley said he has no qualms about acquiring refineries in a $100/bbl oil environment because he sees demand continuing to grow and the price continuing to climb.
If a company isn’t going to buy a refinery at $100/bbl oil, then when are they going to buy a refinery, he asked, pointing out that consumption hasn’t declined and economies haven’t collapsed.
However, he is unwilling to overpay for assets, and the three-year partnership could end up not buying a refinery.
“If it turns out I can’t buy anything … I have to be the protector,” O’Malley said. If he finds something good, he’ll buy it. Otherwise, the venture may be his “swan song.”
O’Malley was mum on which refineries he is considering buying, only saying he is looking at “anything anybody will allow us to look at.”
He would neither confirm nor deny his interest in the refineries Valero may sell.
Valero recently said three of its refineries – the 275,000-b/d Aruba refinery, the 195,000-b/d Memphis refinery and the 85,000-b/d Krotz Springs refinery – are under “strategic evaluation.”
The Memphis refinery is one of four O’Malley
purchased while he headed Premcor, which Valero
purchased in 2005.
When asked why he wants to get back into the U.S. refining game, O’Malley said he is a builder who likes to work, adding “I’ve never been a brilliant day-to-day manager.” He also believes there are “extraordinary” opportunities in the United States, although he does believe prices for refineries are inflated.
He doesn’t expect instant gratification and wouldn’t be surprised if the market for refining assets weakens somewhat.
However, he doesn’t expect the value of refining assets to weaken much despite stronger fuel economy standards, the renewable fuel standard and possible forthcoming carbon dioxide (CO2) regulations because he sees the demand growth environment continuing in the United States.
Marginal plants will decline in value, but larger refineries will keep going strong, he said.
Among other topics O’Malley covered during his conference speech and press conference are:
• Sulfur in jet fuel. Now that ultra-low sulfur diesel is in effect, most of the sulfur is going into jet fuel. It’s ridiculous to say that this cannot be addressed because of cost because doing so would only increase the cost by a few cents per gallon, he said.
“If we are going to clean up the fuels, we must clean them up across the board,” he said.
• Ethanol. O’Malley called it a “politically expedient supply product” and said the U.S. ethanol subsidy is hurting the U.S. and global economies.
“Ethanol is one of the clear culprits” for the current U.S. economic problems, and it is doing little to help the environment and global fuel supply, he said.
He added the European biodiesel policies are causing similar problems.
• Conservation. This is the best way to address high prices and environmental concerns, he said. For instance, automakers are capable of building an affordable 60-mpg vehicle.
He added that the changes to U.S. Corporate Average Fuel Economy standards found in last year’s energy bill are a “Band-aid” that is too little, too late.
The petroleum sector will remain healthy even with conservation, given long lead times, he said.
Meanwhile, the North American Refiner of the Year award winner and keynote speaker Lawrence Ziemba, ConocoPhillips’ president of U.S. refining, told the conference that the changes to the U.S. Renewable Fuel Standard (RFS) and Corporate Average Fuel Economy standards in the 2007 energy legislation will reduce or eliminate projected demand growth for petroleum-based transportation fuels, reducing the economic incentive to expand refineries.
He also said infrastructure for transporting biofuels from plants to refineries and major markets will need to be “dramatically enhanced” to support the demand for biofuels called for by the RFS.
Increased use of flexible fuel vehicles capable of running on E-85 ethanol blends will be necessary to meet the requirements, but the fuel’s lower mileage gives consumers a decreased incentive to use it, Ziemba said.
He added that the refining industry should not be burdened with state and local mandates for regulating CO2 and said he looked forward to a national CO2 framework.
When asked later at a press briefing how ConocoPhillips planned to refine bitumen as part of its joint venture with EnCana, Ziemba said that for at least the next five to seven years, the bitumen would go to the company’s U.S. refineries.
He added that the company’s project at its Wood River, Illinois, refinery “hasn’t really slowed down yet,” but that permitting is taking a long time because of objections from environmental stakeholders. The permitting has changed to a 28- to 30-month process from the usual 18 to 20 months, he said.
The environmental stakeholders are objecting to the permits because of the potential increase in greenhouse gas emissions that may result from the project, although Ziemba said the project doesn’t fall under any greenhouse gas regulations. He expects the U.S. Environmental Protection Agency to make a ruling on the appeal “any day now.”
He also discussed how globally the cost of doing refinery projects has increased dramatically because of increased materials, labor and other factors.
These factors haven’t yet altered the company’s plans, but Ziemba said they would not go forward with projects if the economics are not good.
Also, despite the fuel regulations that refiners face in California, Dutch oil major Shell has no plans to sell its Martinez, California, plant.
Acknowledging it’s no secret that Shell is actively trying to sell its smaller, less complex refineries, David Sexton, the company’s vice president for the Americas portfolio and International Refining & Energy award winner, said during a recent press conference “it is prudent that Shell would retain that [Martinez] facility” because it is a fairly large and complex refinery.
Sexton also said it’s difficult to project the impact biofuels requirements will have on refiners’ profits because regulations are still evolving and fuels such as cellulosic ethanol have yet to hit the commercial market.
Peter Haldis can be reached at phaldis@hartenergy.com
