Monday, May 14, 2007

Oil's Future

Oil's Future
Refinery Owners Upgrading For More Reliability, Profits
By George Avalos/Contra Costa Times

The Valero Refinery in Benicia shown here in a 2003 file photo, will soon have a scrubber installed to allow it to process heavier oil, officials said. (Reporter file/Brad Zweerink)

Several oil giants have plunked down a collective billion-dollar bet on East Bay and Solano County refinery upgrades they believe will help consumers, bolster fuel supplies, increase reliability - and harvest profits.

Although each project differs in scope and details, the upgrades pursue at least two prizes. Some refineries will gain more capabilities to process "heavy" crude oils and crude laced with sulfur. The plants also will become more reliable.

Drivers could benefit as well.

Oil company representatives say if the refineries gain more flexibility in the type of oil they can handle, and the factories can operate with less down time and fewer malfunctions, supplies of gasoline on the West Coast could become more predictable.

This could also mean more of California's crude oil, which is primarily of the heavy variety, could be refined for use in the state.

During the coming few years, the revamps may create thousands of jobs in the East Bay and Solano County. The jobs should pay well, said Greg Feere, executive officer of the Contra Costa County Building and Construction Trades Council.

"It's going to be a huge economic boom," Feere said.

There's a financial upside if refineries run more days and can produce gasoline from heavy and sour crude. The plants will likely create more profits for their owners.

The oil industry's efforts have irked environmental groups and some residents. Activists have fired multiple shots at a huge refinery upgrade in Rodeo being planned by ConocoPhillips. They say they fear air pollution and noise and want the refinery converted to a green factory.

ConocoPhillips expects to be able to increase refinery production by 1 million gallons a day through the project, said Mark Hughes, a ConocoPhillips spokesman. The expansion effort would allow production to jump 30 percent. Contra Costa County planners approved the project 5-0. Environmental groups may appeal the decision to the county supervisors.

The sharp increases in gas prices in California argue for projects that increase the reliability of fuel supplies, oil industry officials say.

"Over time there is a bigger gap between the supply of California clean motor fuels and the demand for that same product," Hughes said. "This project presents an opportunity to satisfy a portion of the gap between supply and demand."

The energy firms also are responding to a shift in oil markets. The type of oil that refiners covet most is what's called light sweet crude, a product with a relatively low sulfur content. Light crude is also easier to process since a refinery furnace has to separate fewer molecules to make pricey end products such as gasoline, jet fuel and diesel.

Unfortunately, light crude, industry watchers say, is getting tougher to find. And this type of oil is also frequently extracted in less politically stable regions such as the Middle East.

That's where heavy, sour grades of crude oil increasingly come into play. These kinds of crude are more readily found. But the refining process is more involved since the heavy crude oil is more dense than its light cousin. The refinery has to separate out more molecules, as well as remove the sulfur in the oil, to produce the same grade of gasoline.

In Benicia, Valero Energy Corp. plans to install a scrubber that will reduce sulfur dioxide emissions from the refinery, said Chris Howe, a spokesman for the Solano County plant. Valero also is preparing other upgrades.

"It will allow us to process heavier and more sulfurous crudes," Howe said. The refinery will also be able to increase slightly the volume of oil it processes.

The Golden Eagle Refinery near Martinez is in the middle of a project costing $400 million to $500 million to modify the facility's coker, said Mike Marcy, a spokesman for plant owner Tesoro Corp. The new facility will replace an outmoded coker complex. A coker is used to process a black powdery residue left behind by the refinery process.

The upgrade at Golden Eagle would remove several hundred tons of emissions, improve the refinery's reliability and create longer periods between maintenance, Marcy said.

Even before Tesoro launched this upgrade, Golden Eagle was already configured to handle heavy and sour crude oil. Roughly a century ago, independent oil executives built the plant to handle the thick crudes from the San Joaquin Valley, Marcy said.

The new coker will need maintenance every five years. The existing coker must be serviced every two to three years, said Alan Savage, Golden Eagle's environmental health and safety manager.

"If refineries are having difficulties, that cuts into gasoline supply," Savage said. "The fewer difficulties you have, the more opportunities you have to supply the market."

San Ramon-based Chevron Corp. plans an upgrade of its Richmond refinery. The project is undergoing final corporate review, said Stephanie Price, a Chevron spokeswoman.

"We are planning to implement a crude slates upgrade project," Price said. "That will increase the flexibility of the refinery to process a broader slate of crude oils."

The costs of these current upgrades are huge:

• Tesoro's revamp at Golden Eagle has a price tag of $400 million to $500 million.

• ConcocoPhillips expects its project will cost "hundreds of millions" of dollars.

• Valero's upgrade in Benicia is expected to cost $400 million to $500 million.

• Chevron did not provide a cost figure for its project.

No wide-ranging expansion is planned at the Shell Martinez Refinery, said spokesman Steve Lesher. Yet even in this case, Shell in the 1990s revamped the plant to handle heavy crude.

"The Martinez refinery was designed around processing heavy crude," Lesher said. "The majority of our crude comes from the Central Valley."

Refinery operators are poised to harvest big-time dividends from plants that can process heavy crude.

Spot prices for heavy crude in early May were about $45 a barrel in North America, the Heavy Oil Info online site reports. That's anywhere from $23 to $27 less than the prices for light crude.

The conversions mean operators can produce gasoline at today's prices, but use a raw material, heavy crude, that costs 35 percent less than light crude. And that means more profits.

"A refinery can benefit from the differential between the heavy and light crude prices," Valero's Howe said. "You can pay less for your feed stock but still get the same price for gasoline."

Some community leaders fear the revamps will degrade their neighborhoods.

Still, estimates are that the Chevron project could employ 1,100 to 1,200 for up to five years, based on an agreement between union leaders and Chevron. Chevron spokeswoman Price put the number at "more than 300" during a two-year stretch.

ConocoPhillips expects to hire 700 for its upgrade, which will also lead to 27 permanent positions at the refinery. Valero said it plans to hire 150 to 300 people in Benicia. Tesoro estimated that 400 people work on the coker project.

"It's really a positive development and these jobs will last for the next several years," Feere said. "And all the new money from paying these people will go back into the community."

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