SOURCE: Baker & O'Brien, Inc.

Baker & O'Brien, Inc.

May 24, 2012 11:42 ET

Recent U.S. Refining Margin Growth Mostly Due to Large Gains in the Mid-Continent and West Coast

Despite Refinery Closures, U.S. Product Exports Continue

HOUSTON, TX--(Marketwire - May 24, 2012) - Baker & O'Brien, Inc.'s first quarter 2012 release to PRISM1 subscribers reflects higher margins overall and improvement in nearly every refining district. When compared against the previous quarter, refinery cash margins2 have risen, on average, about $2.50 per barrel, driven primarily by gains in PADDs 2 and 5 (each up over $3/Bbl.). PADD 4 was the one exception to this trend, with margins declining over $1/Bbl.

In the first quarter, the light-heavy spread (LLS-Maya) declined and crack spreads generally improved. In April, coker margins improved with the widening of the LLS-Maya price spread.

Over the past two years, U.S. exports of gasoline, jet fuel, and diesel have increased over 75%, from about 860 MB/D in January 2010 to over 1,500 MB/D in February 2012, based on 12-month rolling averages. The growth in U.S. exports is especially impressive considering the refining capacity that has been closed over this same time period.

Target export markets can be summarized as follows:

  • Gasoline: Mexico (replacing European imports and refinery supply shortages) and Brazil (driven by recent ethanol production shortages)
  • ULSD: Exports have increased throughout Latin America (Mexico, Chile) and Europe (Rotterdam-area markets)
  • Jet Fuel: Primarily Canada

Over the last several months, gasoline exports have stabilized, with only limited gasoline growth opportunities anticipated in the near future. However, Europe and Latin America are expected to continue as growth markets for ULSD.

The growth in exports has been enabled by two distinct competitive advantages that U.S. refineries enjoy compared to refineries in other countries serving the Atlantic Basin: (1) discounted crude oil prices, and (2) low-priced natural gas.

As previously reported, the collapse in mid-continent crude oil pricing, beginning in January 2011, created huge advantages for most refineries located in PADD 2, which drove refinery utilization rates higher. With PADD 2 refineries running at higher throughput, the need for product transfers from PADD 3 refineries lessened, and alternative markets (including export destinations) were targeted. As North American crude oil production growth continues, and logistical solutions are put in place to move additional crude oil to U.S. Gulf Coast refining centers, this crude oil price advantage will likely further propagate to a larger share of U.S. refining capacity. While the WTI price discount at Cushing may indeed moderate, we believe that there will remain a persistent discount that is sufficient to result in a meaningful advantage for U.S. refineries.

Low U.S. natural gas prices reduce a refinery's energy and hydrogen costs. Each refinery purchases a different volume of natural gas, depending on its configuration (degree of cracking and coking which generate gas), make-up hydrogen sourcing (hydrogen produced from natural gas reforming is most common), and crude slate, among other factors. However, it is illustrative to highlight the relative cost advantage by comparing the cost of hydrogen for producing ULSD. At recent natural gas price differentials between the U.S. and U.K., the U.S. refinery enjoys about a $2 per barrel cost advantage for ULSD production. It is this advantage, combined with Europe's diesel supply shortfall, which will continue to be a major factor driving increased U.S. exports of ULSD.

An additional underlying driver for U.S exports of products is the ability for U.S. refiners to lower their renewable volume obligation under the Renewable Fuel Standard (RFS). This avoids an estimated 2.4 cents per gallon in 2012 RFS compliance costs for every exported gallon.

About Baker & O'Brien
Baker & O'Brien is an independent professional consulting firm specializing in technology, economics, and management practice for the international oil, gas, chemical, and related industries. With offices in Dallas, Houston, and London, the firm focuses primarily on the downstream industry and assists clients with strategic studies, mergers and acquisitions, and technology evaluations. The firm also provides expert services to support insurance claims and a wide range of commercial disputes in the energy industry.

Baker & O'Brien's PRISM software is used to perform detailed analysis of individual refineries and the refining value chain from crude oil load port to products truck rack. The system combines a large historical database with a robust refinery simulator to provide analytical support to competitive analysis, strategic planning, crude oil valuation, and delivered cost of supply. The PRISM database currently includes operational and economic performance details for all refineries in the U.S. and Canada, most refineries in Europe, and selected refineries in the Asia Pacific region. The PRISM system is available for license and is used in consulting assignments for Baker & O'Brien clients.

1 PRISM is Baker & O'Brien's refining modeling and database system that includes operational and economic performance details for all of the refineries in the U.S. and Canada, most of the refineries in Europe, and over 50 refineries in the Asia/Pacific region.
2 Net Cash Margin (Refinery EBITA), $/Bbl. of input.

PRISM is a trademark of Baker & O'Brien, Inc. All rights reserved.

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