HoustonChronicle.com -- http://www.HoustonChronicle.com | Section: Business

Jan. 20, 2001, 10:10PM

Nation's refineries at rest Planned maintenance takes toll on output temporarily, but upgrades boost capacity By NELSON ANTOSH Copyright 2001 Houston Chronicle

The nation's refineries are taking a wintertime breather, starting this month, after running virtually flat-out last year trying to satisfy an insatiable appetite for fuel.

The breather is in the form of turnarounds, industry lingo for maintenance work that can't be done while a refinery is running.

Maintenance turnarounds typically have been a fall and spring chore. For a short period, contract workers swarm over the pipes, vessels and towers of plants that otherwise run 'round the clock.

But there are an abnormally large number of turnarounds in progress now. These jobs were postponed from last year when refineries ran full bore, earning hefty profits during spring, when supplies of gasoline were tight and the fall, when supplies of hearing oil were threatened.

While this is explained as a periodic chore, turnarounds commonly are used to upgrade a refinery. They are a time for many minor plant expansions, jobs designed to end bottlenecks and get more crude through a refinery, which adds up on a nationwide basis.

Thus, the output of refineries has continued to rise as the industry has continued to shut down plants, statistics show. But experts warn there's a limit to this incremental approach.

Additionally, in coming years the monthlong shutdowns in the Houston area will be used to make billions of dollars worth of changes needed to comply with pollution rules. This could stifle expansion, experts warn.

Turnarounds planned nationally for January and early February will remove more than 1 million barrels of refining capacity while the work is in progress, according to industry surveys.

During that time contract workers, supervised by permanent employees, will look for corrosion, clean and paint, replace parts, and frequently make changes that allow more or cheaper crude to be processed.

This weekend, Valero Energy begins a turnaround on its Houston refinery that will shut the 80,000-barrel-per-day plant for a month. When the work is done, the refinery on Manchester Street will be able to handle 3,000 to 4,000 more barrels per day and be able to process a cheaper grade of crude oil.

Another example is the Valero refinery in Texas City, where a turnaround already is in progress. It originally was planned for October but was moved back to January for economic reasons.

When this job is done, the Texas City refinery will be able to process an additional 20,000 barrels per day, bringing its total to more than 200,000 barrels.

Industrywide, there has been a buildup of work that needs to be done going back for two years, said a Valero official in San Antonio.

In 1999, profits were lousy and owners didn't want to spend the money, he said, while last year the profits were so good they didn't want to lose output to a turnaround.

Lately, profit margins have been encouraging downtime. The profit that can be made from a barrel of oil is only one-third to one-half as large as it was during the spring and summer, according to John Parry, energy analyst for John S. Herold Inc. in Norwalk, Conn.

Profits have declined as the sense of crisis over supplies of heating oil faded. Margins along the Gulf Coast were particularly affected because shipment allocations on a pipeline caused a backup of refined products here. Consequently there are more refinery turnarounds along the Gulf Coast.

The soaring price of natural gas -- which is used in large quantities in these energy-hungry plants -- is another reason "a lot of them may be happy to shut" during the winter when heating demand pushes up prices, Parry said.

Historically, turnarounds are done in the fall or spring to stay away from the gasoline season, according to Gary Johnson, in charge of economics and planning for Valero's refinery in Texas City.

There is a certain amount of discretion in how long refineries can go between turnarounds. The big distillation units can go for three or four years, while some other pieces of equipment may need the catalysts changed or the sludge removed annually.

If there is an expansion involved, the cost goes up. In Texas City, for example, Valero will spend $35 million on capital improvements, which is 10 times the $2.8 million it will spend on maintenance. "This is our stock in trade," said spokeswoman Mary Rose Brown.

This sort of creeping expansion has allowed the industry to keep pace with rising demand despite a major decline in refineries.

The number of refineries in the United States plunged from a high of 324 in 1981 to 155 in 2000, according to the Energy Information Administration.

Similarly, the total operable capacity of 18.62 million barrels per day in 1981 slumped to 15.03 million barrels per day in 1994, but has been on a slight upward trend since, reaching 16.51 million barrels last year.

Parry, the analyst, calls this "capacity creep."

This basically negates the downtrend during the past seven or eight years that has seen some 1 million barrels of refining capacity eliminated through permanent shutdowns.

Thus, refineries have gotten bigger and bigger, although confined to the same locations. The American Petroleum Institute said the average daily capacity grew from 65,000 barrels per day in the early 1980s to around 110,000 barrels now.

"If you look at the most basic industries, if they have a site already and have an opportunity to make improvements, they do so," said Bob Slaughter of the National Petroleum & Refiners Association in Washington, D.C.

"That's how refining has been able to keep up for the last decade."

Meanwhile, refineries have been working harder and harder. The average utilization rate went from 68.6 percent in 1981 to a high of 95.6 percent in 1998 and finished 2000 with a 94 percent average.

For practical purposes, 95 percent is about as high as you're ever going to get, said John Siemssen, business manager for Lyondell's interest in the Lyondell-Citgo refinery in Houston.

"Something always happens 5 percent of the time," he said, the equivalent of not running just 18 days during a year, he said. A major turnaround can take a refinery down as long as five or six weeks, he said.

Avoiding unscheduled problems is the real payoff for the work done during turnarounds, said Johnson of Valero.

Incremental expansions are about all that refinery operators can do to increase output, although there is serious concern about there being too little refining capacity in the United States, according to Slaughter of the trade association.

"The handwriting is on the wall -- it is impractical or impossible to build a new refinery in the United States," he said. The newest refineries in the United States were built during the late 1970s.

Federal environmental regulations, state and local environmental regulations, plus the not-in-my-back yard sentiment make building difficult, Slaughter said.

In addition, the uncertain profit picture of the refining business discourages building. Long-term returns on investment have been a meager 5 percent, said Slaughter, with investors who are interested in energy more likely to put their money into exploration and production.

But there is a natural limitation to incremental growth. Even the local residents will fight expansion by trying to have air pollution permits denied, he said.

Expansion by clearing up bottlenecks or changing some pieces of equipment isn't as simple as it might seem, said Siemssen of Lyondell, because each piece has a different upper limit.

His analogy is souping up a car that came out of the factory capable of going 110 mph. You can do things to the engine that get the speed up to 120, but then the tires aren't rated for that speed.

Upgrade the tires, but then the transmission fails at 135 mph. Then the suspension gets unstable at 150 mph. Try to go faster than that, and you have to rebuild the whole car. "It gets to the point, is it worth it?" Siemssen said.

Each refinery has its own point of diminishing returns, he said.

Spending priorities are another issue. "Right now, just about all the money (that was made in 2000) has to be focused on environmental-type things," said John Dosher, senior vice president for Pace Consulting in Houston.

Local refineries will end up at a competitive disadvantage as they spend pollution-control money to deal with oxides of nitrogen -- commonly called NOX -- which is something that competitors even as near as Beaumont will avoid, he said.

The larger refineries here will probably have to spend in excess of $100 million each just on NOX, produced when burning fuel to run the refineries, the consultant said. He doubts it can be done by changing over the low-emission burners alone. That means that engineers may have to resort to installing huge catalytic converters.

Although the deadline is several years away, refineries are doing preliminary work on the NOX problem.

Emissions reduction is already an issue for BP. Around Feb. 1, the giant oil company will take down a catalytic cracker and alkylation unit in its Texas City refinery, idling a big chunk of the third-largest refinery in the United States.

"For the next four or five years, each turnaround and project will be almost surely tied in some way to this issue. We've got boilers and furnaces all over the place," said Darin Beaudo, a BP spokesman.

Nationwide, refineries are looking at a $20 billion tab to meet mandates on sulfur reductions in gasoline and in diesel fuel, and to comply with the new rules on air toxics such as benzene, the National Petrochemical & Refiners Association estimated.

In a supply situation as tight as it is now, turnarounds can be enough to affect the price of refined products.

Valero's current turnaround in Benicia, Calif., in the San Francisco area, will take out of production about 2 million gallons per day of the special California gasoline. This will be enough to affect the market there, Parry said.

At the end of December, gasoline prices along the Gulf Coast already were beginning to increase in anticipation of turnarounds that were planned, according to industry sources.

For the coming year, there is one bright spot for motorists, Doshe said.

The Orion refinery in New Orleans, which was idle last year because of the bankruptcy of its owner, is being reactivated by the creditors.

It should be on line this summer, handling about 150,000 barrels per day, Parry said. This is the only supply boost of any consequence that the consultant is aware of.

But overall, the refining system should be able to meet the needs of motorists this summer "quite handily," says Kevin Lindemer, senior director of downstream research at Cambridge Energy Research Associates.

The crux of last summer's problem was low inventories, which amplified pipeline disruptions or refinery outages. With low inventories, it was a hand-to-mouth situation.

While it's a little early to be making forecasts, said Lindemer, it looks like this year's inventories will be large enough to provide a cushion.

From the refinery standpoint, this promises to be another good year for refinery margins, although it won't be as good as 2000, Dosher predicts. He considers it a welcome change from the prior 10 years when margins were "just lousy."

-- Martin Thompson (mthom1927@aol.com), January 22, 2001