American Refinery Update // S&P Global's Big Picture Report

American Refinery Update

Two updates on America's refineries: one restart, one fire.

Port Arthur, America's largest refinery (with an output of 630,000 bpd), has restarted after an overhaul. It produces aviation fuel, gasoline, ultra low sulfur diesel, high cetane diesel, and Texas low emissions diesel. Generally, Port Arthur pumps out 275,000 barrels of branded fuel per day and 40,000 barrels of oil according to its owner, Motiva.

"A planned overhaul began at the large 200,000-bpd crude distillation unit (CDU) at the refinery on September 30, with November indicated as a timeline for the end of maintenance," reports Oilprice.com. "Motiva Enterprises began restarting that unit on November 8. The CDU was shut down for maintenance together with the 49,000-bpd catalytic reformer 4 (CRU-4) and the lube oil hydrocracker 4 (LHCU-4), and now all those units are being restarted."

But whatever gain the Port Arthur restart provides has been dampened by a refinery fire in California. Tuesday night, a fire broke out at Chevon's El Segundo Refinery. After two hours the fire was put out.

"The El Segundo Refinery, capable of processing 290,000 barrels of crude oil per day (bpd), supplies 20 percent of all motor vehicle fuels and 40 percent of the jet fuel consumed in Southern California," reports Oilprice.com.

American refining capacity still sits lower than before Covid. During the lockdowns, fuel demand plunged causing permanent refinery closures. Others shut down to convert to biofuel. Last year, refining capacity sank for the second year in a row to 17.9 million barrels per calendar day. America is also suffering from a diesel shortage.

"In the U.S., diesel and other distillate inventories are at multi-year lows and sitting at around 20% below the five-year average for this time of the year," reports Oilprice.com. "Some refineries were under maintenance this autumn, reducing the availability of products."

S&P Global's Big Picture Report

The main takeaway from S&P Global's The Big Picture: Electric, Natural Gas and Water Utilities report is the deepening commitment to wind and solar. The Inflation Reduction Act has created an extremely salutary economic environment for renewables. But is it all roses?

Supply chain problems remain stubborn with no easy solutions on the horizon. And it will be years until America sees domestic solar and wind manufacturing--if it ever materializes. And then there's a struggle for raw materials.

"Metals such as cobalt, nickel and lithium are needed for wind, solar and battery storage components, and sourcing these metals has created headaches for developers. The rapid growth expected for renewables and battery storage has led to fears that development of these technologies may outpace the supply of certain required materials," reports S&P Global. "Lithium-ion batteries are currently the dominant technology for grid-scale battery storage and developers are rushing to address lithium supply chain bottlenecks as the growing segment is competing with the burgeoning electric vehicle market that also depends on lithium technology. Storage companies are also working to come up with new cost-effective technologies as concerns rise over the global supply of lithium."

Plus, there's a human capital problem: the renewables industry needs far more workers than it has. The US Interstate Renewable Energy Council conducted a National Solar Jobs census that found 89% of solar companies struggled to find qualified applicants, for example.

The other major hurdle is transmission and distribution. Renewables are built far from where their energy can be consumed, so they need new transmission and distribution to get linked up to the grid. "Electric T&D constraints are already a concern with the supply of renewable generation already online as curtailment and congestion costs are rising around the country. Recent studies estimate that T&D capabilities need to increase between two- and fivefold over the next decade to keep up with the increase in variable generation deployment, and this was before the passing of the IRA," reports S&P Global.

The IRA enables a slew of options for clean energy development, but per the American tradition of governance, the federal government has left working out implementation to the states.

"In the absence of a cohesive national strategy, the states have been setting their own individual energy transition agendas for more than a decade," said Lillian Frederico, the Research Director at S&P Global. "There are marked differences in terms of the timeline and ultimate end-state to be achieved, as well as the definitions of 'renewable' or 'clean energy' resource."

What about capital expenditures? Renewables make up for a sizeable chunk. "Projected renewable energy investments for the RRA utility group are forecast to reach more than $19 billion in 2022, declining in 2023 to $14.7 billion, according to RRA’s Spring 2022 forecast," S&P Global reports. "The IRA contains extended clean energy tax incentives and other provisions for solar, wind and battery storage projects that will support utilities’ development and ownership of new renewable energy resources."

But renewable capex is dwarfed by investment in what makes renewables possible: transmission and distribution. Taken together, they make for 50% of capital expenditure. "Electric T&D investments for the U.S. electric and multi-utility holding companies covered by Regulatory Research Associates, a group within S&P Global Commodity Insights, are expected to approximate $65 billion in 2022 and more than $67 billion in 2023. With the IRA expected to provide an additional jolt to wind and solar generation investments, the need for rapid grid expansion and modernization is apparent."

All of this means more precarity for the American electric grid as the country continues to plunge capital into unreliable resources while neglecting thermal generation.

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Conversation Starters

1. Russia seems to be gathering troops in Belarus. "New satellite imagery obtained by RFE/RL's Belarus Service shows thousands of Russian troops may have returned to Belarus, raising questions about whether another incursion into Ukraine from the north is imminent -- or if Moscow, with the help of Minsk, is merely trying to distract Kyiv," reports Oilprice.com. Is this a threat? Russia doesn't "have enough combat power to launch an offensive [from Belarus], and there are no vital Ukrainian points nearby," said Mark Cancian, a military analyst at the Washington-based Center for Strategic and International Studies.

2. Russia sent its second-ever crude tanker to China via the Arctic Circle, a new route that could open up the Asian market to Russian crude. "The Vasily Dinkov, a specialized ice-breaking tanker, is traveling along the Northern Sea Route after loading crude late last month from a storage tanker moored at Murmansk," reports Bloomberg. "The ship, hauling a relatively tiny cargo, crossed Russia’s northern coast and passed through the Bering Strait, separating the country from Alaska, over the weekend. It’s due to arrive at the Chinese port of Rizhao on Nov. 17."

3. The Energy Information Administration expects natural gas prices to average $6/MMbtu. "We forecast natural gas prices at the Henry Hub will begin to decline in the spring of 2023 as production growth continues and winter demand for heating subsides. For 2023, we forecast the annual Henry Hub price to average $5.46/MMBtu for the year," reports the EIA.

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