Refiners shifting their focus from gasoline to diesel | Front page | Chron.com - Houston Chronicle
Refiners cranking up diesel output to meet rising global demand
Growth in the developing world helps offset drop in U.S. gas sales
By BRETT CLANTON and LYNN COOK
Copyright 2008 Houston Chronicle
Dec. 29, 2008, 11:53PM
A drop of more than $100 a barrel in oil prices in recent months has lowered regular gasoline prices, but global demand and tighter supplies have kept diesel prices high.
With Americans pumping less gasoline and predictions that the trend could continue, refiners are taking steps to boost production of diesel fuel, which is expected to be in higher demand around the world in coming years.
The moves are helping refiners stay afloat after gasoline profits evaporated in 2008 amid the sharpest pullback in gasoline usage in more than two decades.
But they also suggest a broader shift in focus by the nation's refiners, from the U.S.-centered gasoline business to the faster-growing global diesel market.
"Clearly, the global emphasis is on diesel right now," said Sherman Glass, president of Exxon Mobil Refining and Supply Co., citing predictions that worldwide diesel demand will be more than double that of gasoline in coming years, mostly because of continued growth in the developing world.
Earlier this month, Exxon Mobil became the latest major refiner to reveal plans to increase diesel output, following moves by Valero Energy, Motiva and Marathon Oil. The Irving-based oil giant said it will spend more than $1 billion to upgrade facilities in Baytown, Baton Rouge and Antwerp, Belgium, boosting its worldwide diesel production by about 10 percent.
The investment and others like it will be felt on the Texas Gulf Coast, home to nearly a quarter of the nation's oil refining capacity and tens of thousands of industry jobs. They come at a time when nose-diving oil prices and jitters about the global economy are prompting oil companies to cancel projects rather than launch new ones.
But concerns remain about the impact of a long recession on petroleum fuel demand, as well as the threat of adding too much new refining capacity, a situation that could flood the market with fuel and hurt refiner profits.
That prospect will be tested as soon as January, when Reliance Petroleum's refinery in Jamnagar, India, comes online. With a capacity to run 580,000 barrels of crude a day, Jamnagar will be the world's sixth largest refinery. Major refinery expansions are also under way in the U.S.
In recent months, a drop of more than $100 a barrel in oil prices brought relief to drivers in the form of lower diesel and gasoline prices, which hit records this summer. But diesel prices have remained higher amid stronger global demand and tighter supplies.
On Tuesday, the national average diesel price was $2.44 per gallon versus $1.62 per gallon for regular gasoline, according to AAA's Daily Fuel Gauge survey.
Despite lower gasoline prices in recent months, U.S. drivers have reduced consumption by 3.1 percent this year, the biggest annual drop since 1981, according to the American Petroleum Institute, an industry trade group.
Red ink avoided
The decline in usage comes after $4 pump prices this summer spurred drivers to conserve, more corn-based ethanol was mixed into the nation's fuel supply and the recession cut jobs and kept workers off the roads.
U.S. diesel demand has also slipped this year, partly due to the slowdown in home construction, but domestic refiners have been buoyed by robust diesel demand overseas.
"If it weren't for strong diesel demand around the world a lot of refiners would be seeing a lot of red ink," said Gary Heminger, executive vice president in charge of refining at Marathon Oil Corp.
Indeed, domestic refiners exported an average of 450,000 barrels per day of diesel fuel in 2008, up from 175,000 barrels per day last year. During the last decade, average diesel exports were closer to 50,000 barrels per day, said Ron Planting, statistical director for the American Petroleum Institute, an industry trade group in Washington.
While U.S. refiners have been producing record amounts of diesel to supply the domestic market, U.S. diesel exports were higher in 2008 partly because of downtime at European refineries and other factors that tightened supplies around the world, Planting said.
"If they could sell it here they would, let's put it that way," he said.
In the U.S., not an easy shift
In the U.S., where only 2 percent of the passenger car fleet uses diesel, diesel fuel represents about 20 percent of petroleum consumption, while gasoline is closer to 45 percent. In most countries, the balance is in favor of diesel.
This month, a government report predicted that U.S. demand for liquid petroleum products, including gasoline and diesel, will be essentially flat through 2030, with all the growth being met by increased biofuels usage.
But diesel demand is expected to keep growing rapidly around the world. China, India and nations of the Middle East are building their economies on the backs of trucks, trains and other modes of transportation that require diesel. In Europe, motorists are also turning more to diesel for personal vehicles.
The problem is that most U.S. refineries are configured to maximize gasoline output and switching to diesel is not a simple fix, said Matt Tormollen, chief executive of FuelQuest, a fuel supply chain management firm in Houston.
"Really, there's not a lot of flexibility from a production standpoint," he said.
Cleaner by 2010
Some refiners, like Exxon Mobil, have addressed this challenge by adding new diesel capacity at U.S. facilities where upgrades were already in the works. Federal laws require domestic refiners to produce a cleaner-burning diesel fuel by 2010, a process that requires new equipment to remove sulfur from the fuel.
Marathon is currently adding 90,000 barrels of diesel production capacity as part of a $3.4 billion expansion to its refinery in Garyville, La.
The Houston-based company originally planned for diesel to account for 30 percent of the facility's output, but now it expects diesel to make up 45 percent of production when the refinery starts up in late 2009, Heminger said.
San Antonio-based Valero, the nation's largest refiner, expects to boost its systemwide diesel output from 33 percent to 40 percent by 2012. Expansion projects are planned at company refineries in Port Arthur and St. Charles, La., and will add 100,000 barrels of new distillate capacity, company spokesman Bill Day said.
Earlier this month, Valero announced it would cut back gasoline production at 10 of its 16 refineries, including the units in Port Arthur and Corpus Christi.
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