Stormy Weather Exposes Refiners Weaknesses
Hurricane Harvey’s crippling impact on U.S. oil refinery operations this month and the challenge buyers faced in filling the gap in gasoline supplies has exposed a shortage of spare refining capacity around the globe.
Nearly a quarter of U.S. refining capacity was knocked out by the storm this month, driving U.S. gasoline prices to two-year highs above $2 a gallon. Many plants are still struggling to resume normal operations, prompting other refineries around the world to crank up output to fill the gap.
Global refining is considered to be running at its maximum when capacity utilization is 85.5 percent, the highest level reached in the modern era, BP’s head of refining economics Richard de Caux said.
Today the utilization level is 83 percent, he told the Platts Refining Summit in Brussels, suggesting a very slim buffer.
“The spare capacity is not really there,” said Dario Scaffardi, general manager of Italian refiner Saras. “In as much as consumption worldwide is growing, refinery capacity is not long at all.”
Spare capacity is needed to meet demand when refineries undergo maintenance or face unexpected outages. Too much in reserve is costly for refiners. But Hurricane Harvey has shown the world may not have enough.
Consultant JBC Energy said refiners could process 83 million bpd of crude by the end of 2017. In 2016, BP data showed processing at roughly 80.6 million bpd.
Energy consultancy FGE estimates spare global refining capacity, based on official or nameplate numbers, stands at 14 million bpd, down from 18 million bpd earlier this decade.
But nameplate figures can be misleading, as they are based on capacity of a refinery when built or refurbished. Many cannot match those levels due to years of underinvestment. So actual spare capacity may only be a fraction of that 14 million bpd.
For example, Venezuela’s four refineries have run at record lows this year as they lack spare parts. Plants in Mexico, Brazil and Nigeria have also suffered poor investment for years.
At the same time, demand for oil and its products is climbing, led by China and India, and more developed economies.
-Damaged New Zealand Fuel Pipeline Restarted
A damaged pipeline that resulted in a fuel shortage across New Zealand and grounded hundreds of flights was restarted after repairs were completed, officials said.
“This is a significant milestone,” New Zealand Refining Co Ltd said in a statement on its website. It said it expected to be delivering jet fuel to Auckland Airport.
More than 100 flights were cancelled over the past three days and many more delayed, disrupting the plans of thousands of travelers.
The government called in the military to help truck in supplies of fuel just days before a general election.
Damage to the 170 km (105 miles) fuel line, which supplies almost all of the fuel for New Zealand’s largest city, was believed to have been caused by a digger.
Refining NZ Chief Executive Sjoerd Post later told New Zealand media that full capacity would probably not return until early next year.
“We are in a start-up process ... so we’re going carefully,” Post told Fairfax Media. He said the pipeline would operate at 80 per cent capacity until further tests were carried out over the next few months.
The New Zealand government set up a commission to oversee the response to the crisis amid concerns raised by tourism industry officials about the impact on the international reputation of the South Pacific island nation.
Tourism has soared to record levels of more than 3.4 million visitors a year to New Zealand.
U.S. Oil Drillers Cut Rigs
U.S. energy firms cut the number of oil rigs operating for a third week in a row as a 14-month drilling recovery stalled as companies pared back on spending plans when crude prices were softer.
Drillers cut five oil rigs in the week to Sept. 22, bringing the total count down to 744, the least since June, General Electric Co's Baker Hughes energy services firm said in its closely followed report.
That put the rig count on track for a second month of losses in a row and also its biggest monthly decline since May 2016. It was also on track for its first reduction in rigs over a three-month period since the second quarter of 2016.
The rig count, an early indicator of future output, is still higher than the 418 active oil rigs a year ago as energy companies had mapped out ambitious spending programs for 2017 when they expected U.S. crude to be higher than the $50 per barrel range where they are currently trading.
Crude prices were up about 7 percent so far this month after declining in five of the past six months, including a near 6 percent drop in August as rising U.S. output helped to add to a global glut.
U.S. shale production is set to rise for the 10th month in a row in October to a record high 6.1 million barrels per day, according to a U.S. government projection this week.
Although several exploration and production (E&P) companies have trimmed their investments for this year due to the drop in crude prices, they still planned to spend much more this year than last year.
Analysts at U.S. financial services firm Cowen & Co's capital expenditure tracking was unchanged this week, showing the 64 E&Ps it tracks planned to increase spending by an average of 49 percent in 2017 from 2016.
That expected 2017 spending increase followed an estimated 48 percent decline in 2016 and a 34 percent decline in 2015, Cowen said.