Feature: Atlantic Basin refinery closures impact tanker shipping
Monday, 13 February 2012 | 00:00
The questionable economics of running an oil refinery along the US Atlantic Coast and in Europe has taken its toll in recent weeks. Petroplus, an operator of five European refineries, initiated insolvency procedures after banks called in their loans while in the Philadelphia area two refineries have ceased processing oil and a third will do so in the coming months. Another victim of the shrinking and often non-existent margins available to Atlantic Basin refiners is the 350,000 barrels per day (bpd) Hovensa facility at St. Croix in the US Virgin Islands.
Given that the regions served by these facilities will still require their quotas of refined products, the logistics of future Atlantic Basin fuel distribution systems are coming under the spotlight. For tanker owners the possibility that the closures to date herald the removal from service of further struggling oil refineries in the months ahead is adding a sense of urgency to the shipping impact assessments now underway.
All appreciate that the tanker trades will need to rebalance but the complex interrelationships that prevail in the trans-Atlantic movements of crude oil and refined products make it difficult to pinpoint a final outcome.
Because of their importance as distribution hubs, the refineries now closing will be utilised as storage depots for refined petroleum products. As the crude oil will have to be processed elsewhere in future, at locations distant from the point of consumption, both the crude oil and product tanker fleets will be affected by the recent refinery closures. As a general observation, crude oil tonne-miles will decrease while those for product tankers will rise. Furthermore, the impact on product tankers will be greater than that on crude carriers.
Since the onset of the financial crisis in September 2008, a total of 2.6 million bpd of oil refining capacity has been taken out of service in industrialised nations, most notably through the closure of nine refineries in Europe and half a dozen in the US. The shutting down of the three large refineries in the Philadelphia region alone is taking 700,000 bpd out of circulation, or about 45% of the available US East Coast refining capacity.
The Atlantic Basin refineries that have ceased operations are the victims of a number of factors that have worked in concert to wreak havoc. They include decreased demand for oil; higher crude prices, especially for lighter, sweeter grades; restricted access to funding; increasingly strict environmental legislation; the prohibitive cost of refinery upgrades; and the competition offered by new Worldscale refineries in the Middle East and India.
Operators of the Hovensa refinery at St. Croix, for example, decided to shut the facility after racking up losses of USD 1.3 billion over the past three years. A year ago the capacity of the refinery was cut by 30%, to 350,000 bpd, in a bid to reduce costs but the strategy only afforded a temporary stay of execution. About 85% of the refined product output of St. Croix was directed to US East Coast markets.
The re-emergence of St. Croix as a petroleum products storage and distribution hub is expected to go through as soon as this month, February 2012. The demise of the facility as a refinery will have limited impact on the crude oil tanker market as much of the oil processed onsite was supplied by a pair of Suezmax vessels on short shuttle runs from nearby Venezuela. As Venezuelan oil will now have to travel farther to reach refining facilities, the net effect on crude carrier demand is positive. The very large crude carrier (VLCC) sector could be the leading benefactor if Asian refiners purchase most of the displaced oil.
In its new guise as a petroleum product storage terminal and distribution hub, St. Croix will have a more marked impact on the product tanker trades due to the need to source major cargo volumes from distant locations.
The delivery of substantial volumes of refined products necessitated by the closure of the Philadelphia refineries is also having knock-on effects in the crude oil and product tanker trades. The major product streams of the three refineries were gasoline, diesel and heating oil. European refineries are expected to supply most of the gasoline shortfall while securing the requisite volumes of diesel and other middle distillates could be more problematic, not least due to the high demand for diesel in Europe. Some modification of the jetty facilities and terminal pipework will be needed as part of the refinery-to-storage depot transformation programmes.
As a result of the closure of the three Philadelphia refineries, most of the crude oil feedstock traditionally supplied to these facilities from West Africa, the North Sea and the Mediterranean will now be directed to European refineries. West Africa has traditionally been the main provider, accounting for 75% of the crude oil processed in Philadelphia in recent years. The switch of refining to Europe is likely to reduce the number of Suezmax size crude tankers required in the Atlantic Basin by 27.
The impact on the product tanker fleet will be markedly different. Despite the closure of the Petroplus refineries, there is still sufficient excess processing capacity in Europe to supply the Philadelphia storage depots with the majority of refined products required. Trans-Atlantic deliveries of products from Europe will arrive at the Philadelphia storage terminals on board medium-range product (MR) tankers of 50,000 DWT and long-range 1 (LR1) vessels of 75,000 DWT.
Some of the affected West Africa crude output will be purchased by Reliance for processing at its large Indian refineries in Jamnagar and, following on, delivery to the Philadelphia storage tanks in long-range 2 (LR2) product tankers of 110,000 DWT. It is estimated that this new India-US East Coast trade will require the services of 10 LR2 product tankers.
Products sourced from the US Gulf will also be delivered to the Philadelphia terminals, carried in US-flag MR tankers. Gulf refineries are larger and more efficient than those on the US East Coast and are able to utilise growing volumes of domestic crude oil sourced from shale formations in Texas and Louisiana. The availability of sufficient US-flag MR tonnage could be an issue if the status of the Gulf as a product supply centre grows.
US researchers MJLF & Associates estimate that European refineries could be supplying 425,000 bpd of products to Philadelphia by the end of 2012, Indian refineries 120,000 bpd and US Gulf refineries 50,000 bpd. The carriage of these cargoes would effectively mean that the closure of the three Philadelphia refineries is creating the need for approximately 27 MR, four LR1 and 13 LR2 product tankers. Furthermore, the shutdowns will boost US product imports by 33% over the course of this year, up to near the record level of 1.6 million bpd recorded in 2006.
Petroplus is Europe’s largest independent refiner and depends solely on oil processing. Unlike the oil majors, the company cannot rely on other oil supply chain activities to compensate for losses in the refining sector. Three of the company’s five refineries have been shut down and it is hoped a buyer will be found for the remaining two complexes to enable their continued operation.
In filing for insolvency in January 2012, Petroplus cited a spike in Brent crude oil prices, increased competition from refineries in India and the Middle East, tightening environmental legislation and the decision by banks to close off its credit lines. The refiner’s margins from processing Brent crude into gasoline, diesel and other fuels in northwest Europe fell to a loss of 26 cents a barrel in December 2011 from a profit of 51 cents a month earlier.
The recent closure of the Philadelphia, St. Croix and Petroplus refineries will effectively remove an additional 1.4 million bpd of Atlantic Basin oil processing capacity by mid-2012. The refinery shutdowns will result in net inflows of petroleum products into the region, making it more reliant on seaborne imports of high-quality refined products from farther afield. All product tanker segments will stand to benefit.
In contrast, the recently announced contraction of Atlantic Basin refinery capacity will have a negative impact on crude oil tankers side, not least because West Africa-US movements have traditionally accounted for about 14% of Suezmax cargoes. Suezmax rates fell 42% in 2011 and are forecast to slip a further 12% this year. Newbuilding deliveries, which will increase the overall size of the Suezmax fleet size by 11% in 2012, are not helping matters.
Going forward, the shakeout in the Atlantic Basin refining sector is far from over. Of the 110 European refineries, for example, approximately 25% are of an older vintage that will require some modification to enable the output of products to the new specifications being mandated by Brussels.
Pressures to close some of these older European refineries will be reinforced by the embargo that the European Union is placing on imports of Iranian crude oil from July 2012. While such an embargo will serve to reduce crude oil tanker demand, it will also spur a step increase in Europe’s busy coastal product tanker distribution trades.