New, expanding refineries a long-term solution, companies say

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Knight Ridder Washington Bureau

WASHINGTON, D.C. — President Bush called Tuesday for a serious expansion of the nation’s refining capacity to make more gasoline and other fuels. Energy companies support the goal, but warn it won’t make a dent in high pump prices for several years.

“It ought to be clear to everybody that this country needs to build more refining capacity to be able to deal with the issues of tight supply,” Bush said during a White House news conference. Bush pledged to support legislation being drafted in Congress that would make it easier to expand refineries and build new ones.

Insufficient refining capacity is partly to blame for today’s high gasoline prices, which on Tuesday averaged $2.94 a gallon nationwide. Since U.S. refiners can’t make enough gasoline to meet demand, the rest must be imported. Last year, 14 percent of all gasoline sold in the United States was imported.

Bush pledged to support financial incentives for an industry that hasn’t built a new U.S. refinery in 29 years. In 1981, there were more than 300 U.S. refineries; today, there are 148. National refining capacity is down to 17.1 million barrels per day from 17.9 million barrels a day in 1981.

Glenn McGinnis, the chief executive of Arizona Clean Fuels LLC, welcomed Bush’s call for action. His privately held company has been locked in a complicated state and federal permitting battle since 1999; it’s hoping to construct a small refinery outside Phoenix with a capacity of 150,000 barrels per day.

“Someone needs to feel accountable for the schedule in issuing permits. It’s not the fault of any individual agency, but none of them have a legislative mandate to manage the schedule,” McGinnis said. He hopes to break ground next year on the nation’s first new refinery since 1976 and begin operating in 2010.

Arizona Clean Fuels supports legislation pending before the House of Representatives that would make the Department of Energy shepherd the permit process for refinery expansions and construction.

But even with streamlined approvals, it would take four years or more before refinery expansions or construction could be completed. That’s partly because refineries being built in Saudi Arabia, China and elsewhere have left the global
market tight for the specialty materials needed to build them.

Those shortages are weighing heavily on the minds of executives at Motiva
Enterprises LLC. It’s a joint venture between Shell Oil Co. and Saudi Refining Inc., a division of the Saudi state oil company Aramco. Even before hurricanes Katrina and Rita decimated the Gulf Coast energy infrastructure, damaging at least 10 percent of the nation’s refining capacity, Motiva was weighing expansion.

Motiva President William B. Welte said in an interview Tuesday that he expects to reach a decision within months about expanding its Texas refinery at Port Arthur by as much as 325,000 barrels a day. That’s on top of the 270,000 barrels a day Motiva now produces there.

“Even if we put the 325,000-barrel capacity on line, I think the market is still going to be pretty tight,” Welte said.

Valero Energy Corp., based in San Antonio and the nation’s largest refining company, has increased its expansion plans. Spokeswoman Mary Rose Brown said Valero expects to expand its capacity of 3.3 million barrels per day by 406,000 more barrels per day by 2010. That will cost $5 billion.

“Valero would be in the camp that says anything the federal government can do to support investment in refining would be good,” Brown said. She added that a lack of government incentives and high environmental compliance costs made for a poor investment climate in the 1990s.

The emirate of Kuwait is among those now voicing interest in building a U.S. refinery. Kuwaiti Oil Minister Sheik Fahd al-Sabah told the White House in September that he’d build if the process could be simplified. The offer remains on the table, according to officials in the Washington office of the state-owned Kuwait Petroleum Corp.

New construction in Asia, China and Saudi Arabia is leaving U.S. refiners at the back of the supply line. And with simultaneous expansions planned here, U.S. refiners increasingly will compete against each other for construction materials.

“The price for the steel is up, the competition for the manufacturing slot is up, so they’ve (refiners) become quite pricey, which is going to keep a lot of people out of going into this business,” Welte said.

With gasoline prices at record highs, some consumer groups accuse refiners — which suffered dismal earnings through much of the 1990s — of collectively refusing to add capacity in order to drive up profits.

“There needs to be more supply-side regulation of this industry. The industry knows it will make more money by making less gasoline,” said Jamie Court, the president of the Los Angeles-based Foundation for Taxpayer and Consumer Rights.

Refiners counter that investment in expansion was curtailed by the high cost of complying with sundry environmental and fuel-quality standards. The National Petrochemical and Refiners Association, a lobby in Washington for refiners, estimates that the industry spent more than $47 billion between 1993 and 2003 on compliance with rules, and will spend $20 billion more in this decade.

Rules were made “with little attention to impact on refineries,” said Robert Slaughter, the association’s president.

Dan Reicher, a former Energy Department chief of staff during the Clinton administration, disputes that federal rules explain why refiners haven’t expanded.

“I think it’s incorrect that the primary obstacle was Clean Air regulation. This was much more a capital decision on the part of the industry,” he said. “There were clearly signals being set that the country could use more capacity.”

Refiners acknowledge that annual returns on investment for expanding capacity sometimes were as low as 4 percent in the 1990s. Investment in oil exploration and production was more attractive.

With refinery capacity tight and oil prices high, the industry has reason today to consider expansion.

“I think what we’re looking at now is that kind of imperative that hadn’t existed in the last several years for refining capacity,” Reicher said.

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