The largest gasoline market in the world hasn't seen a new refinery open in 29 years. Though the industry enjoyed record profits last year, it isn't likely to break that streak anytime soon.
Despite dramatically improved profit margins, most refiners still don't believe that the 5 percent a year return on investment is worth plunking down $2 billion to build a new facility.
New refinery construction has been stunted for years by poor economics, changing environmental rules and vociferous community opposition.
The years long struggle to obtain the necessary air and zoning permits is another factor stymieing the building of new facilities. Instead, refiners run their facilities full-tilt and resort to upgrading and expanding them.
Currently, the US has some 149 refineries processing nearly 17 million barrels of crude a day. This is less than the 1981 figure of 325 refineries handling 18.6 million barrels a day. With demands 20 percent higher today, much of the deficit is made up by imports and also with refiners adding capacity to their existing sites.
Connecticut-based Premcor Refining Group plans to spend up to $220 million to boost capacity at its Port Arthur refinery. San Antonio-based Valero Energy Corp. will add 36,500 barrels-per-day of capacity across its refineries, while Marathon Ashland Petroleum is expanding its Detroit refinery by about 26,000 barrels a day.
Good refining years tend to encourage major expansion projects.
Refining margins, the difference between the cost of a barrel of oil and the price of products made from it, hit $16 a barrel during the second quarter of last year and averaged $10.44 for all of 2004. This is a significant increase from the average margin of $6.45 between 1999 and 2003.
Despite the lucrative margins, experts believe that refiners are not expected to expand production capacity at the same rate as in previous years.
This might be because refiners have tackled the easier expansion projects and have been busy making changes to meet new lower-sulfur regulations.
Concerns over a shifting federal regulation known as New Source Review might also have stifled investments.
During the Clinton administration, an interpretation on the law required refiners to make environmental upgrades when performing what the industry deemed routine maintenance.
Under pressure from the industry, the Bush administration has backpedaled on that provision.
Over the next several years though, we can expect new facilities.
Phoenix-based Arizona Clean Fuels plans to build a $2.5 billion, technologically advanced refinery in southwest Arizona. The company hopes to negotiate an oil supply agreement with Mexico's national oil company, Pemex, which would ship crude to the Pacific Coast using an existing pipeline.
The crude would then be loaded aboard tankers and shipped up the West Coast. The investment group would then build a pipeline from the coast to the refinery.
Considering that the Arizona Clean Fuel partners have been trying to obtain the necessary air permits since 1999, many in the industry remain dubious.
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