US coker outlook:Issues for new capacity Stephen Burns Houston Bureau Chief Argus Media
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Coke production:Unique features? • Coke production is not driven by coke demand • Supply reflects refinery utilization and investment strategies
US gasoline challenges • Demand to keep growing • Infrastructural capacity constraints • Tightening specifications to limit imports
No new refineries • World-scale refinery of 200,000 b/d would cost $2 billion? • New Source Review battle in courts creates uncertainty • NIMBY syndrome turning into BANANA • Never any good news about refinery emissions • High US retail gasoline prices do not hurt consumers enough
“Golden Age” for refining? • Refining margins hit record high • Sour crude discounts enhance margins at complex refineries • Q2 profits to eclipse all of 2003? • Sentiment hangover after 20 years of low returns • High utilization = deferred maintenance = coke supply risk?
Coker growth path • Gulf Coast coker capacity from 800,000 b/d in 1998 to 2.1 million b/d now • Mexico, Venezuela encouraged projects to secure market share for heavy crudes • Around 2mn b/d of Pemex/PdV crude to US Gulf Coast • Advances in coker technology improve economics
Significant recent US additions • ChevronTexaco, Pascagoula: extra 800,000 t/yr from 2003 • Valero, Texas City: New 45,000 b/d coker in $337 million upgrade, started up October 2003. Extra 1.08 million t/yr; could reach 1.20 million t/yr? • Valero, St. Charles: Expanded coker by 15,000 b/d, Q1 2004 • ConocoPhillips, Wood River: extra 300,000 t/yr from April • Citgo plans for Corpus Christi?
Factors against new coker investment • Cokers are expensive propositions - $400mn for 50,000 b/d? • Economies of scale favor cokers in larger refineries – most of the obvious candidates already have them • Mexico crude production reaching a plateau • Venezuela struggling to achieve political stability • Massive drain of investment funds for Tier II spending
Refiners bearing the burden • Tier II spending will cost refining industry $20bn • Re-orientation of industry following mergers • Majors were more likely to plan for long-term • Independents don’t have as much financial clout • Oil price assumptions have not yet moved up much
Factors in favor of coker investment • Increased OPEC production to keep sour discounts wide? • Will international refiners make the investment needed to meet tighter US standards? • Venezuela potential as gasoline supplier unfulfilled? • “Secular upcycle” underway for refiners? • Potential for Canada’s oil sands to head south?
Summary • New coker investment is slowing as opportunities filled • Capacity creep reaching limits, new units needed. • US gasoline demand growth plus tighter specifications will underpin margins, but sentiment lagging • Remaining Tier II costs will sap available funds • If not now, maybe later?