The Refining Sector - Strangled by Stupidity

abarrelfullabarrelfull wrote on 19 Jan 2014 20:27
Tags: refinery

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The travails of the refining sector are all too well known. Slumping demand in developed countries, growing supply elsewhere, changing sources and quality of crude, emissions and specifications regulation are all problems that the management of refineries need to deal with.

All sectors face difficulties and these issues have their corresponding ones in many other industries. What most of these don’t face however, is the curse of the Stupid. Refining is being damaged by a whole array of stupidities, and there is little we can do about it.

  1. Uneconomic new capacity: Whilst the world and especially certain regions of it need new refineries, the sheer capacity of potential projects is staggering. Non refinery supply is rising rapidly and yet companies everywhere are still deciding to sink billions of dollars into increasing the surplus. What is more, most of the companies doing so are state owned and do not expect to make a profit. The supreme example here is Petrobras, a company with access to reserves that most oil executives would give their right arm for. Whilst developing these needs hundreds of billions of dollars, precious capital is being wasted building new refineries to supply gasoline at an effective cost higher than importing from the USA
  2. Tax Inequality: Whilst many of us complain at the share of the pump price that goes to the treasury of which ever jurisdiction we happen to be a tax serf in, this is no what I am referring to. Rather, it is the policy of taxing gasoline more than diesel. In a world where shale oil and gas is increasing the size of the gasoline pool whilst providing cheaper alternatives in petrochemicals, much of the world has pushed consumers to buy diesel cars with their ill thought out taxes. Equalise the taxes and Europe’s refiners would, over time have much less of a surplus gasoline problem, whilst the total cost of fuel would actually fall
  3. Shale Allergy: In the USA, refiners have access, not just to cheap oil, but also cheap gas. It is possible that their French or Polish or UK competitors could get a look in on that cheap source of energy. I am not claiming that it will be as cheap, or even that it will happen at all, but just the possibility is something to get happy about. Yet legislators in many countries have decided to try and prevent it happening, whilst their power generators burn ever more coal, and produce ever more CO2.
  4. Land of the Over Regulated: Recent events have shown that some of our views on the USA are actually wrong. When it comes to the ability to trade, there are some very big restrictions. Now all of the Gulf coast refineries have the ability to process Canadian, Venezuelan or Mexican heavy crude, supplies of light crude have increased exponentially. Exporting this would marginally reduce crude oil costs for all of us and help balance markets. It would also stop what is effectively dumping by US refineries at the expense of their rivals. Yet driven by logic that Stalin would have recognised, US producers are not allowed to export, except to their fellow oil producing NAFTA neighbours. As if this were not enough, the Jones Act means that supplying US coastal refineries in the East, with domestic crude, is extremely expensive.
  5. Subsidised Competition: By far the least cost effective way to reduce CO2 emissions is by electric vehicles. Yet governments everywhere have decided to subsidise the acquisition of completely useless technology in the belief that it is somehow a good thing. The only losers are the competition, the tax payer and of course the planet.
  6. The Empire of the Bear: Who in their right mind would acquire gasoline focused, export driven, Italian refineries? The Russians that’s whom. Whilst we await the restructuring that would rebalance the sector, Lukoil and Rosneft are snapping up a who’s who of uncompetitive assets. Why? I have an idea or two but they are probably libellous.

So whilst we struggle on, try to reduce costs, improve yields, look for better sources of raw materials and rationalise those assets that no longer make sense, we also curse those who are making our lives harder than they need to be. The International Coalition of Idiots and their Strangling Curse.

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