(Bloomberg) – The next step for some U.S. refineries that are well backed could be a point.
Marathon Petroleum Corp. plans to shut down its Gallup, New Mexico refinery next week, a person familiar with the matter. It is the first facility in the U.S. to close as the coronavirus pandemic clears the skies of passenger planes and the streets of cars.
It is probably not the last time. Major U.S. refineries, including Marathon, Valero Energy Corp. and Phillips 66, have lowered prices in their facilities to a minimum as the storage tanks fill up with fuel that they cannot sell. While this “minimum level” varies from company to company and actually from plant to plant, it is usually between 60% and 65% of the capacity. Many of these facilities have to be shut down.
“If refineries still can’t move their products after minimizing rates, they face the prospect of being shut down completely,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston.
Slowing down a refinery is not like turning down the fire on a gas stove when the water threatens to boil over. A refinery is a complex network of interconnected units. As soon as the amount of crude oil processed in the distillation plant is too low, the secondary plants do not have enough raw material to continue operating. Because many units operate under both high pressure and temperature, it becomes more difficult to maintain the correct operating conditions.
“It is difficult to keep the refinery in balance,” said Stephen Wolfe, head of crude oil at Consultant Energy Aspects Ltd. “The rule of thumb for me was always 65% of the CDU. Things get complicated underneath. If you lower the rates, all downstream processes have to be properly supplied. There are hydraulic restrictions on how deep you can go.”
Refineries have been forced to take drastic measures to cut fuel supplies as gasoline demand has dropped by almost half and storage tanks have filled up. Measures to slow the spread of Covid-19 have hit petrol and jet fuel particularly hard, causing wholesale prices below 20 cents per gallon in some markets and squeezing profit margins.
US refineries have been processing the least raw and other raw materials since 2011, which, according to government data, represents a decrease of around 3.5 million barrels a day from the end of the year. With total fuel demand falling by more than 7 million barrels a day since the beginning of March, the reductions have not been enough to stem the growing tide.
“Plants are becoming minimum prices as product retention becomes a major problem in the United States,” said Wolfe. “If this fails, shutdowns are the only solution to the huge supply problem we have.”
While some complexes with multiple sets of raw stills and secondary units can shut you down, smaller plants are less flexible. If the entire system needs to be idle, the units can either be recirculated where hot oil circulates but no fuel is generated, or shut down completely.
Depending on the type of oil used, the minimum rates for raw units can be between 60% and more if there are multiple units and how much storage is available, Lipow says. “If you have multiple units, you can shutdown one and operate the other at different rates.”
When a catalytic gasoline cracker is closed, steam is lost that other units need to operate. Closing the cracker means finding a place for intermediate raw materials such as vacuum gas oil, which is generated by the raw unit. An internal refinery cannot simply bring the intermediate products on a ship and send them to another location, but instead has to store them or send them away by expensive rail.
If only crude oil prices are reduced, conversion units such as FCCs and hydrocrackers will lack the intermediate materials they need to operate, and they will also have to be reduced, or raw materials will have to be purchased to operate them.
“There are more considerations than just saying that we can turn this device off and there are no additional effects,” said Lipow.
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