Major refiners have been circumspect about their [image-nocss] plans, saying that they are considering options that could include closing refineries, selling parts of their operations, laying off workers and slashing spending. "Refineries will have to be closed," Fadel Gheit, senior energy analyst with Oppenheimer & Co., told the newspaper. "Unless this excess capacity is permanently shuttered, a recovery in refining margins is unsustainable."
Last week, Chevron Corp. launched an overhaul of its fuel-making and retailing business with a plan to cut at least 2,000 jobs, put a refinery in Wales up for sale and take a hard look at its Hawaii refinery, said the report. Royal Dutch Shell said it was reviewing its refinery operations with the idea of keeping only those with the best growth potential. Sunoco Inc. has sold one plant and said last month that its previously idled Eagle Point, N.J., refinery was being shut down permanently. Valero Energy Corp., the nation's largest refiner, closed a Delaware refinery last year, laying off 500 workers, and mothballed a plant in Aruba.
"We're assessing the entire East Coast, whether we should be there or not," Valero CEO William R. Klesse told executives at a recent energy conference.
Energy industry executives say they are facing up to what was previously inconceivable: The nation's appetite for petroleum products might never return to levels seen earlier in the decade, even if a strong economic recovery takes hold.
"None of us will sell more gasoline than we did in 2007," Tony Hayward, group CEO for oil giant BP, said during a recent earnings teleconference.
For motorists, talk of refinery cuts promises to be anything but cheap, the report said. Leaner supplies could translate into higher pump prices punctuated by expensive spikes when operations are disrupted by weather or other events.
Consumer advocates want regulators to investigate refinery closures and consolidations that slash supply, the report said. Refiners say they are merely trying to improve profits so they can keep making gasoline.
"There have been dozens of investigations by state and federal agencies, including some with subpoena power, and not one has ever found evidence of any conspiracy or collusion to manipulate prices," Tupper Hull, spokesperson for the Western States Petroleum Association, told the paper.
If gasoline does not seem particularly cheap these days because operators are keeping a tight lid on production, the report said. U.S. and European refineries are running at the lowest rate in more than a decade, Gheit said.
Still, compared with demand, there are too many refineries, he said, and an estimated 3 million barrels a day of excess capacity in the United States and Europe must disappear to achieve sustained improvement in earnings.
Refiners raked in big profits from 2003 to 2006, but "by 2007, it was largely over," Tom Kloza, chief oil analyst for the Oil Price Information Service (OPIS), Wall, N.J., told the Tribune.
Some people worry that refiners might cut so much that price surges will become inevitable.
"The question is whether they are going to overadjust," Phil Flynn, an energy analyst for PFGBest Research, told the paper. "Probably, they will."
And while the cost of crude has risen in the past year much faster than the price of gasoline at the pump, Big Oil absorbed a huge body blow to the bottom line, said a MarketWatch report.
After racking up sharp losses on their refining businesses in the last quarter of 2009, energy companies are facing a longer-term struggle even as the summer driving season approaches and the economy shows signs of life.
"There's been a fundamental shift in the U.S. demand and the price of gasoline," Lynn Westfall, chief economist for San Antonio, Texas-based Tesoro Corp., told the news outlet. "Growth in China and India are driving crude prices higher. But demand in the U.S. is weak and so you can't pass the higher costs along."
Stoked by expectations of a rebound of the global economy, crude quickly doubled to $80 a barrel and higher in the past year. Meantime, gasoline prices have crept up much more slowly to about $2.75 a gallon.
While the U.S. Energy Information Administration (EIA) projects average retail prices for gasoline to break through the $3 a gallon barrier this summer, that is not enough to counteract prospects for weak demand, said the report.
"Given the state of the economy, the state of the unemployment ratepeople's jobs, my guess is that a lot of people aren't feeling a lot better about this year's vacation than they did on last year's," Rex Tillerson, CEO at Exxon Mobil Corp., Houston, told reporters on Thursday.
Collectively, the three largest U.S.-based oil companies ExxonMobil, San Ramon, Calif.-based Chevron and Houston-based ConocoPhillips lost $1 billion in their downstream operations in the fourth quarter, compared to a profit of $5.3 billion in the comparable year-ago period, the report said. During that same time, however, Wall Street bid up shares of oil producers and refiners on hope for an economic rebound.
The current malaise in stock prices and refining margins grew from the sudden onset of the global recession, just as the oil and gas industry completed huge refinery expansions, which were planned in the years leading up to the heady days of $100-a-barrel oil in 2008.
Refinery demand has chilled in part from the growing production of ethanol and other biofuels as dictated by U.S. standards on renewable fuels. Gas-guzzling sport utility vehicles are less popular nowadays in favor of cars that get better mileage. Automakers are also readying a new crop of electric cars that burn little or no gasoline.
In meetings this week with Wall Street analysts, oil companies made it clear that these and other factors will not improve their refining and marketing fortunes for the time being. "Sluggish demand and surplus [refining] capacity will be with us for some time to come," Mike Wirth, a senior executive in Chevron's downstream business, told analysts this week. "As a result, refining margins have come off dramatically and are likely to remain depressed for several years. These conditions don't give us reason to expect much help from the market. So we have to improve performance on the things we control."
Chevron announced plans to cut 2,000 workers this year, on top of 1,500 that were let go in 2009, while placing several refineries up for sale. While Chevron ranks as the most profitable producer of oil and gas per barrel, it's the "least profitable refiner," Deutsche Bank analyst Paul Sankey told MarketWatch.
As for ExxonMobil, its officials say they have been cutting back on refining capacity for the past several years, hoping to stand apart from Chevron and other companies that have moved to close refineries. "We didn't wait until times were difficult to evaluate our portfolio," Mike Dolan, a senior vice president at ExxonMobil, told the news outlet. During a presentation to analysts in New York, Dolan said the oil major has sold 10 refineries in the past few years. It's also divesting its retail gasoline stations in United States.
Tillerson said the U.S. gas station business operates on razor-thin margins because of competition from Wal-Mart and others. Selling salty snacks and car wash services is the only way to make the business worthwhile. "We didn't want to be the leader in car washes," Tillerson told MarketWatch. "We're methodically exiting the business [(in the U.S.]."
According to the EIA, U.S. gasoline production peaked in 2007 at 9.29 million barrels a day. In 2008, production fell for the first time in several years. The government now projects a return to 2007 levels by 2011, when production of 9.44 million barrels of gasoline a day is expected.
Meanwhile, Wall Street was treated to a glimmer of hope in recent days, said the report, when weekly gasoline supplies fell by 2.9 million barrels; forecasters had expected an increase of about 200,000 barrels. Still, supplies remain about 5.9 million barrels above the five-year average for this time of the year.
Dolan compared the current plight of the refining business to conditions in the 1980s, which took about five or six years to correct. "It's difficult to shut refineries down," he said. "It's impossible to predict how long [a correction] will take because it's a question of how long the marginal players can hold on."
While the oil majors have their upstream oil and natural gas production business to turn to for profits, standalone refiners such as Valero and Sunoco have been hit hard, the report said. Valero is in the process of selling facilities, including refineries in Delaware and Aruba, while it scooped up corn-based ethanol plants at basement prices after VeraSun and other players went bust in 2008.
Meanwhile, Wall Street is pinning its hopes for Big Oil on higher production and resource development, not refining or marketing, MarketWatch said.For more on how refinery losses and shut downs may affect fuel pricing along the supply chain, watch for the April issue of CSP magazine.
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