• 8 hours Oil Pares Gains After API Reports Surprise Crude Inventory Build
  • 9 hours Elon Musk Won’t Get Paid Unless Tesla Does “Extraordinarily Well”
  • 9 hours U.S. Regulators Keep Keystone Capacity Capped At 80 Percent
  • 10 hours Trump Signs Off On 30 Percent Tariff On Imported Solar Equipment
  • 12 hours Russian Funds May Invest In Aramco’s IPO To Boost Oil Ties
  • 13 hours IMF Raises Saudi Arabia Growth Outlook On Higher Oil Prices
  • 14 hours China Is World’s Number-2 In LNG Imports
  • 1 day EIA Weekly Inventory Data Due Wednesday, Despite Govt. Shutdown
  • 1 day Oklahoma Rig Explodes, Leaving Five Missing
  • 1 day Lloyd’s Sees No Room For Coal In New Investment Strategy
  • 1 day Gunmen Kidnap Nigerian Oil Workers In Oil-Rich Delta Area
  • 2 days Libya’s NOC Restarts Oil Fields
  • 2 days US Orion To Develop Gas Field In Iraq
  • 4 days U.S. On Track To Unseat Saudi Arabia As No.2 Oil Producer In the World
  • 4 days Senior Interior Dept. Official Says Florida Still On Trump’s Draft Drilling Plan
  • 4 days Schlumberger Optimistic In 2018 For Oilfield Services Businesses
  • 4 days Only 1/3 Of Oil Patch Jobs To Return To Canada After Downturn Ends
  • 4 days Statoil, YPF Finalize Joint Vaca Muerta Development Deal
  • 5 days TransCanada Boasts Long-Term Commitments For Keystone XL
  • 5 days Nigeria Files Suit Against JP Morgan Over Oil Field Sale
  • 5 days Chinese Oil Ships Found Violating UN Sanctions On North Korea
  • 5 days Oil Slick From Iranian Tanker Explosion Is Now The Size Of Paris
  • 5 days Nigeria Approves Petroleum Industry Bill After 17 Long Years
  • 5 days Venezuelan Output Drops To 28-Year Low In 2017
  • 5 days OPEC Revises Up Non-OPEC Production Estimates For 2018
  • 6 days Iraq Ready To Sign Deal With BP For Kirkuk Fields
  • 6 days Kinder Morgan Delays Trans Mountain Launch Again
  • 6 days Shell Inks Another Solar Deal
  • 6 days API Reports Seventh Large Crude Draw In Seven Weeks
  • 6 days Maduro’s Advisors Recommend Selling Petro At Steep 60% Discount
  • 6 days EIA: Shale Oil Output To Rise By 1.8 Million Bpd Through Q1 2019
  • 6 days IEA: Don’t Expect Much Oil From Arctic National Wildlife Refuge Before 2030
  • 6 days Minister Says Norway Must Prepare For Arctic Oil Race With Russia
  • 6 days Eight Years Late—UK Hinkley Point C To Be In Service By 2025
  • 7 days Sunk Iranian Oil Tanker Leave Behind Two Slicks
  • 7 days Saudi Arabia Shuns UBS, BofA As Aramco IPO Coordinators
  • 7 days WCS-WTI Spread Narrows As Exports-By-Rail Pick Up
  • 7 days Norway Grants Record 75 New Offshore Exploration Leases
  • 7 days China’s Growing Appetite For Renewables
  • 7 days Chevron To Resume Drilling In Kurdistan
Alt Text

Research Unveils New Promising Biofuel

New research suggests that young…

Alt Text

Oil Refiners And Farmers Battle Over Biofuels

Trump has agreed to meet…

Alt Text

Bioplastics Threaten Big Oil

Global oil demand is set…

Government Regulations Harming US Refiners

Government Regulations Harming US Refiners

March was a challenging month for refiners. Three weeks ago I discussed the issue of the looming ethanol blend wall, which is leading to soaring costs for refiners as they attempt to comply with federal ethanol mandates. Refiners saw their share prices beaten up a bit as a result.

Then, at the end of March, came news that the US Environmental Protection Agency (EPA) is proposing to lower the limit on sulfur in gasoline from 30 parts per million (ppm) down to 10 ppm. The cost of complying with the new regulations has been estimated in the range of $10 billion in capital for adding new hydrotreater capacity to the refineries. Annual operating costs are expected to increase by $3.4 billion by 2030, according to the EPA.

The EPA sought to downplay the cost issue:

“The program would cost about a penny per gallon of gasoline, and about $130 per vehicle. The annual cost of the overall program in 2030 would be approximately $3.4  billion; however, EPA estimates that in 2030, the annual monetized health benefits of the proposed Tier 3 standards would be between $8 and $23 billion.”

The EPA cited the following justification for the tighter standards:

“The new standards would annually prevent:

• Between 820 and 2,400 premature deaths
• 3,200 hospital admissions and asthma-related emergency room visits
• 22,000 asthma exacerbations
• 23,000 upper and lower respiratory symptoms in children
• 1.8 million lost school days, work days and minor-restricted activities”

I won’t dissect the EPA’s estimates on the health benefits, because I simply don’t know if they are reasonable. But the agency’s estimate of a penny per gallon in increased costs isn’t realistic.

US demand for gasoline is now at 133 billion gallons per year. Some of that gasoline is imported, and some is already at the lower sulfur level. But even if you spread the EPA’s own estimate of $3.4 billion in new operating costs across all 133 billion gallons of US gasoline consumption, that alone comes to more than 2.5 cents per gallon. That is 2.5 times the EPA’s estimate of 1 cent per gallon in increased costs even before accounting for the additional capital expenditures and the other factors I discuss below. Even if we assume that US gasoline consumption again begins to grow, there is no way that $3.4 billion in new annual operating costs translates into only 1 cent per gallon.

I was working at the ConocoPhillips refinery in Billings, Montana when the ultra-low-sulfur-diesel (ULSD) specifications were enacted. Thus, I got a firsthand look at the situation before and after these regulations were implemented. Again, I am not arguing that the new specs weren’t needed, but instead simply making observations of what transpired. (For the record, I support tough environmental standards, but as an investor think it’s also important to properly calculate their costs.)

Related article: Using Microbes to Increase Oil Recovery from Old Wells

First, ConocoPhillips invested a great deal of capital across the company to make sure that we could comply with the new regulations -- as did many other refiners. I am not sure if the amount was made public, but these hydrotreater projects cost hundreds of millions of dollars. Following the conversion we experienced ongoing costs to the hydrotreaters that were required to reduce the sulfur content. These included maintenance expenses as well as the cost of the additional hydrogen.

Those costs are well-known, but the cost of ULSD after the new specs came into effect was higher than many anticipated. This is because there were at least three other impacts that weren’t widely anticipated.

First, the additional level of processing reduces the overall product yield. When hydrocarbons are fed to a hydrotreater some of what would have ended up as diesel is converted into light gases that end up being burned in the refinery as fuel gas. A lower liquid product yield from a barrel of oil will necessarily increase the cost of the product.

Second, these changes increase the complexity of the refinery, which is something I pointed out in a 2007 column. The more failure points within a refinery, the more potential for an outage. While I wouldn’t attribute it entirely to the new ULSD regulations, according to the Energy Information Administration’s US Percent Utilization of Refinery Operable Capacity, the average refinery utilization in the five years before the new regulations (2001-2005) was 91.9 percent. Starting in 2006 -- when the regulations came into effect -- refinery utilization never again reached 90 percent. Utilization declined for four straight years, averaging 86.6 percent in the five years beginning with the implementation of the ULSD specifications (2006-2010).

Average Refinery Utilization

Finally, some refiners decided that it was more economical not to invest the money, and instead simply export the product into markets that could still accept the higher sulfur diesel. In the five years prior to the new regulations, exports of higher sulfur diesel averaged 43,000 barrels per day. By 2008 those exports had skyrocketed to nearly 500,000 barrels per day, and today remain about four times higher than they were prior to 2006.

US Exports of Distillate Fuel Oil

Related article: Ageing Giant Oil Fields still Dominate World Oil Production

These factors resulted in higher production costs and significantly higher diesel prices. Again it is instructive to look at the five-year time periods just before and after the regulations took effect. From 2001 to 2005, the average retail price of diesel was 4 cents per gallon cheaper than gasoline. From 2006 to 2010, that relationship was flipped as retail diesel was 17 cents per gallon more expensive than gasoline.

Retail Diesel Minus Retail Gas Price

Whether the more restrictive sulfur specifications are money well spent is an entirely different issue, and it isn’t my intent to argue that these specs should not be implemented. However, the EPA’s estimate that the incremental cost added to a gallon of gasoline will only be a penny per gallon is not credible.

I don’t believe the new specs will have a huge long-term effect on refiners, but they will cut into profits. Companies will be forced to allocate capital, which will mean diverting it from other projects that could have added to profitability. In light of this, the increased cost of complying with the ethanol mandates, the recent softening in the price of gasoline (which has cut into margins), and the fact that refiners have had such a tremendous run over the past year, conservative investors would probably be wise to lighten up on the sector.

For those with a longer-term horizon, it is certainly frustrating to see the recent run of strong performance partially derailed by the government, but the refining sector will survive. If you are investing for the next five years, you could do a lot worse than sticking with US refiners.

By. Robert Rapier




Back to homepage


Leave a comment
  • John Reagan on April 11 2013 said:
    Hard to feel sorry for the oil industry what with massive profits, massive tax credits and Congressmen like Speaker Boehner buying up tar sand stocks before trying to cram the Keystone Pipeline down our throats so Texas Refineries can export refined product to Europe at a profit... As for Ethanol? Hey! Big Agriculture wants a piece of the pie too! Plenty of taxpayer pockets to pick for everyone! Quit yer bitchin!

    The taxpayer, consumer and our budget deficit better off if Big Oil and Big Ag's welfare checks were stopped and the marketplace was allowed to do its thing.
  • Andrea Diederech on April 26 2013 said:
    Aw, I'm certainly concerned about this just being the nail on the coffin for those almost bankrupt oil companies, gee. That estimated $10 billion in capital lost to either expand the refineries existing hydrotreater's capacity or replace the hydrotreaters to large capacity ones that they're in compliance with new EPA regulations AND and estimated additional $3.4 billion annually in operating costs will completely crush big oil. How dare the EPA do something like this?! Those people are just weak already, definite 47%-ers, so why bother with this for people who won't even pay their hospital bill and don't have fabulous private health care coverage (the American way) because they can't pay for premiums even with Obamacare.

    I'm far more concerned about the state that some oil companies, especially ExxonMobil, bless them. They only had profits of $452.9 billion in 2012 and only had a 28% jump in revenues from 2011. I hope their venture into fracking and purchase of XTO Energy in what, 2010? Yeah, then. I just hope that pays off. And dear me, prayer cicle for Chevron, $11 billion lawsuit in Brazil, clean-up after a natural gas rig explosion in Nigeria, and a neverending lawsuit in Ecuador that if Ecuadorian law allowed it it would be better to settle probably but whatever, maybe they have a legal team that doesn't know when. To name 3 of the legal issues. Plus it's their profit amount revenue in 2 years.

    Sca-ary. I need a Xanax now. (I'm also a big pharma fan.) Okay, Chevron... oh, they were in much more dire straits than ExxonMobil with only $245.6 billion in profits. Sad, isn't it? I cried a little.

    I do think it is time for big agriculture to have a little time in the spotlight, though. Get those federal subsidies, work it, work it. If big oil can, come on, corn and ethanol should get a crack at government cheese for corporations and those already wealthy. And those tax breaks plus loopholes? Oh, god, yep. Oil needs to let big ag taste that.


    LOL. No, this article is like an adulr crying over losing a $5 that got lost in the wash. Petty, horrible, callous and is a little peek under the facade big oil tries to run around with but fails if to fool anyone that isn't in the oil business or an aged yuppie who failed at becoming a yuppie and was more of a a guppie. The exceptions are essentially the people who cling to their words like it's irrefutable truth, or pundit junkies who do the same thing for people already mentally numb and void of opinions they made independently.

    Cracking up, all of it. Wow.

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News