BY TOM WHIPPLE
It has been six weeks since we last discussed the problems that could be in store for the U.S.'s East Coast due to closing of refineries in the Philadelphia area.
Last week, the U.S. Department of Energy issued a second, more detailed report on what could happen to the availability of oil and prices in the event the third and largest of the three Philadelphia refineries in question be forced to close down this coming July. In contrast with most DoE reports, this one contains a clear, unambiguous warning that there likely will be serious troubles later this year and on into 2013 in the form of local shortages and higher prices for gasoline and other oil products.
To recap the problem, two of the nine East Coast refineries with a capacity of 363,000 barrels a day (b/d) have recently been closed down. Sunoco which owns a large Philadelphia area refinery (with a capacity of 335,000 b/d) is seeking a buyer and says it will close the refinery in July unless one can be found. These three refineries comprised 50 percent of the East Coast refining capacity as of last summer. Interestingly, the Sunoco's Philadelphia is the oldest continuously operating refinery in the world having been established in the 1860s. The company says the price of imported crude which costs refiners roughly the going rate in London, plus about $2 a barrel for shipping, simply makes refining along the East Coast unprofitable.
There is some good news in the situation, however, as a refinery in Delaware recently reopened after a two year shutdown adding another 182,000 b/d to regional refining capacity; the bad news is that a big refinery in the Virgin Islands recently closed, halting the 200,000 b/d of refined products it was sending to the East Coast so the region is currently down about 380,000 b/d.
Adding to the problem is the issue of West European exports to the Northeastern U.S. Last year, the region imported about 250,000 b/d of gasoline from Europe. With the EU in the process of losing some 600,000 b/d of Iranian crude in the next few months, exporting gasoline from the EU may be a touch more difficult later this year. Although it may be hard to believe, an alternative source for gasoline seems to be India, which is already sending 40,000 b/d to the U.S.'s East Coast. While the Indians have a lot of refining capacity, they are starting to have problems getting crude from Iran.
Although it may be hard to believe, an alternative source for gasoline seems to be India.
The EIA says the refinery situation, which will be greatly exacerbated if the third one shuts down in July, will leave us with two kinds of problems. The first will be to where find additional barrels of gasoline and low sulfur diesel and how to transport them to the region and the second will be distributing these products to those areas that have been completely dependent on the Philadelphia area refineries.
The most serious problems are likely to develop in Pennsylvania and Western New York State where oil products are delivered by pipeline from the refineries in question. There seems to be no quick fix for moving oil products into Pennsylvania and Western NY as the product pipelines originate at the refineries and reworking the piers, pipelines and storage terminals to adapt them to handle finished products rather than crude brought in by ship will take time and be expensive.
Shortage-induced price spikes, however, would make it profitable to move tanker trucks of gasoline and distillates into the fuel-short areas. The EIA estimates that the breakeven point for moving a tanker load of gasoline the 300 miles from NY Harbor where there is adequate supply of gasoline and diesel to Pittsburgh or Western New York would be about 20-30 cents a gallon. Long haul trucks and drivers are likely to be in short supply, however, raising shipping costs well above the breakeven point. The existing product pipeline network can bring gasoline and other products from the Midwest as far to the east as Pittsburgh, but from there on the distribution of finished gasoline, heating oil, and diesel would have to be rail or road tanker.
Ultra Low Sulfur Diesel (ULSD), which is now the standard fuel for trucks, trains, heavy equipment etc. will be the most difficult to find and distribute and would likely be the first to develop shortages. While there are adequate sources of ULSD along the U.S. Gulf coast, getting them to the Northeast may be a problem. The pipelines are fully utilized and the Jones Act requires that shipping between U.S. ports be in US flagged ships. There are very few available tankers meeting the requirements available and cost of using them is three or four times as much as foreign flagged ships.
Another problem is that most of New England, starting with NY State this summer, is scheduled to switch to ultra low sulfur heating oil which was to have been refined in the Philadelphia refineries. This will increase the consumption of ULSD by 70,000 b/d in the winter. Even with the relaxation of the Jones Act and the environmental regulations, there seems to be a potential for problems in the near term.
The Pennsylvanians in Congress are very concerned about the situation. The House has scheduled hearings for March 19 and the Senate is planning to hold them also. Some have suggested that the Federal Government intervene in order to keep the Sunoco refinery operating, but this seems difficult to do in that it is losing considerable amounts of money and the owner wants to get out of the business. Finding a buyer in the next few months also seems unlikely given the large number of refineries that have come on to the market recently. Profitable refining seems to be one of the casualties of high oil prices.
Given enough time, the markets and the infrastructure will rebalance, but for now it looks as if the Northeast may be in for some abnormally high gasoline and diesel prices in comparison to the rest of the country.