July 9, 2012:

Engineers India Ltd (ENGI.NS) said late on Saturday it had won a consultancy contract worth 7.2 billion rupees ($129.5 million) from state-run Bharat Petroleum Corp (BPCL.NS). The contract is to raise crude refining capacity to 15.5 million metric tons a year from present 9.5 million metric tons at Kochi refinery run by Bharat Petroleum in southern Kerala state, Engineers India said in a statement.

By Reuters

July 9, 2012:

Keeping in mind the complex nature of the U.S Refinery Industry, we have tried to analyze the industry's key catalysts in a simple way. In follow up articles we will present detailed company analysis.

Industry Introduction

The Oil & Gas Industry is divided into three segments, Exploration and Production (E&P) (Upstream), Pipeline and Processing (Midstream) and Refining and Marketing (R&M) (Downstream).  Crude oil produced by E&P is sent through pipelines/tankers/ships to refineries, where crude oil is processed and different petroleum products are made, which are then sold through marketing to the end client, directly or through other means.

Refining

Refining crude oil results in output being higher than the input. The increased volume of petroleum products produced is called processing gain. The U.S. processing gain averaged around 6.2% from 1996-2010, which is a 42 gallon barrel of crude oil being converted into approximately 45 gallons of refined products. Crude oils can be differentiated upon their API gravity (density) and sulfur content. Low API gravity (lighter) crude oil produces a higher proportion of profitable products such as diesel, gasoline and jet fuel, which can be refined with simple distillation. High gravity crude oils produce a lower share of profitable products through simple distillation and needs further refining to produce the required amount of profitable products. High sulfur content is considered an undesirable characteristic in crude oils due to both processing and product quality.

Output

A barrel of crude oil is converted into Motor Gasoline, Diesel, Jet Fuel, and Other Products.

Source: EIA

Other Inputs

Apart from crude oil, refineries use other inputs to produce petroleum products. The additional inputs include Natural Gas Liquids (NGL), lease condensates, and crude oil products that are partially refined.

Marketing

The marketing segment sells refined petroleum products to relevant consumers through retail outlets of the company and distributors.

Refining Business

Numerous factors influence the profit margins for refineries, including the type of crude oil processed (sweet/sour heavy/light), delivery method, location, and crude oil prices. Refining is a margin business, and higher absolute prices tend to weaken demand and make it harder to pass on increases in their costs, but refiners have no control over the price of oil, so they focus on finding crude oil (heavier) trading at a discount, and will yield the products they need to meet their sales commitments in the short term. In the long term, it involves investing so as to enable them to refine these heavier crudes, if allowed by regulators.

Complex refineries have flexibility in the choice of crude oil utilized as feedstock and can benefit from the use of lower priced crude feedstock (heavy crude oil), which normally sells at a discount to light crude oil. Gasoline prices fluctuate in line with crude oil prices, and complex refineries that can switch to lower priced crude feedstock will witness better profit margins. However, simple refineries, that cannot refine these heavy crude oils will witness their margins squeeze in time of rising light crude oil prices.

North American Oil Production on Rise

Oil production in North America has been on the rise in the past few years due to the shale oil boom and the sand oil. The Bakken shale underlying North Dakota has time and again been named among the top contributors to the increased production of light oil in the U.S. On the other hand, the Canadian sand oil have witnessed increased output of the heavy oil, which is finding its way to the U.S. and the output is expected to increase 50% in the next three years. There are expectations that the U.S. may achieve energy independence by 2035 due to the abundant supply of oil and gas in North America as a result of the shale boom, and reduce the import of crude oil from the Middle East significantly, if not completely.

Refineries Shifting Toward Heavy Crude Oil Over The Past Few Years

Global production of oil is gradually moving towards heavier, sourer crudes because the easily available deposits of light, sweet crude are being tapped out, has forced refineries to evolve and switch towards refining the heavy crude oils. A refinery designed to handle light, sweet light crude oil cannot switch to heavy, sour sand oil without severely upgrading itself. U.S. refineries have invested billions in upgrades over the last decade to enable them to process heavy crude oil.

Concerns For Refineries On The Gulf Coast

Refineries along the Gulf Coast need heavy oil, since they have been switching to the heavy crude oil. Since they couldn't easily switch from light to heavy crude oil, they can't switch from heavy back to light crude oil. The heavy crude oil is available in abundance due to the Canadian sand oil. However, the problem being faced is due to the lack of infrastructure, as the heavy crude oil is being sent to the oil hub at Cushing, Oklahoma from the Canadian sand oil, it is not being transported to the refineries on the Gulf Coast due to a last of infrastructure (pipelines). The laid down pipeline infrastructure runs from the Gulf Coast towards the North and was used to send refined products. To resolve this, some of the pipelines like the Seaway pipeline are being reversed to carry the heavy oil from the North to the Gulf Coast.

Bakken Shale Oil Opportunity For Refiners In The North

The oil produced from the Bakken shale is mid-weight and fairly sweet, and the refineries in the region are equipped to refine the production from the promising shale.

Crude Oil Price Differential

Due to the supply glut at Cushing, Oklahoma, the WTI has been trading at a discount to the Brent in the recent past. The heavy crude oil (sand oil) trades at a discount to the WTI. Hence, at a significant discount to the Brent.

World Refining Capacity

A significant production of the crude oil in the world is sent to the U.S. (Gulf Coast) for refining, the finished refined products are then exported to respective destination.

Refining Margins of U.S. Refineries

Due to the crude oil price differential and the differentials between inland and coastal crude oils, refiners depending on crude oil from North America are expected to enjoy higher refinery margins. Some of the potential beneficiaries include HollyFrontier Corporation (HFC), Valero Energy Corporation (VLO) and Marathon Petroleum Corporation (MPC). These refineries are concentrated on the Gulf Coast and the Midwest, making it a beneficiary of the oil production from the Bakken Shale, and the pipeline reversal being done to transport the discounted sand oil to the Gulf Coast.

By Seeking Alpha

July 9, 2012:

Canadian crude discounts shrank on Monday as Canadian and U.S. refineries that run heavy and light supplies neared restart after a busy maintenance round. Western Canada Select heavy blend for August last sold for $23 a barrel under benchmark West Texas Intermediate, compared with $26.75 a barrel under WTI late last week. The differential has tightened by nearly $7 a barrel since the start of the month. Light synthetic, upgraded from bitumen wrung from the Alberta oil sands, was quoted at $2.75 a barrel under WTI, compared with $3.90 a barrel under late last week. Market sources said there was no major operational issue driving up the Canadian barrels, only a steady drawdown in storage volumes and steady demand. The widening of WCS spreads early this month had surprised many.

Beginning late this week, some refineries are slated to restart operations after weeks of planned maintenance. Imperial Oil Ltd has said its 186,000 bpd Strathcona refinery near Edmonton, Alberta, is due to restart around the middle of July. Units at Marathon Petroleum Corp's 206,000 bpd refinery in Robinson, Illinois, are also scheduled to return to service during the period. Another Imperial plant, the 121,000 Sarnia, Ontario, facility, is expected to restart units by mid- to late July. On Monday, Citgo said there was no production impact from a compressor shutdown at its 167,000 barrel a day Lemont, Illinois, refinery on Sunday.

By Reuters

July 8, 2012:

Vietnam's only oil refinery reached full capacity on Monday after resuming production on the weekend following an eight-week shutdown for equipment checks, the head of the operator of the Dung Quat facility said.  The plant's closure had prompted domestic distributors to aggressively seek oil products in the spot market due to reduced term supplies from the refinery. "The plant has been running with 90 percent of crude oil input from the Bach Ho grade," Nguyen Hoai Giang, chief executive officer of Binh Son Refining and Petrochemical Co (BSR) said on Monday. He added that the 130,500 barrels-per-day refinery, which restarted on Saturday after being shut on May 16, could continue crude imports in the second half of the year. The operator has said the facility was closed so equipment could be checked, with its builder, French oil services group Technip (TECF.PA), signing off on the process.

BSR had planned to restart the refinery, which supplies around a third of Vietnam's domestic fuel consumption, by the end of June, but the checks took longer than expected, Giang has said. The plant's owner in March was looking to sell a 49 percent stake to foreign investors to raise funds and boost its capacity by more than half. Dung Quat needs more than $2 billion of investment to expand its processing capacity by nearly a third to 192,000 barrels per day (bpd), or 9.5 million metric tons (10.5 million tons) per year.

By Reuters

July 8, 2012:

Many nigerians believe that the ever present challenges of fuel scarcity and subsidy could be conveniently resolved if new refineries are built, as national demand cannot obviously be met from the antiquated facilities available in existing government refineries. In recognition of this inadequacy, 23 licences for new refineries were approved by the authorities; 20 of these went to investors from the private sector, while the federal government and Chinese investors undertook to build additional refineries in Kogi, Lagos and Bayelsa States respectively. Surprisingly, no licencee has begun construction; initially, licencees decried the huge upfront start up fee requirement. Ultimately, the government reconsidered and accordingly reduced the fee in line with investors' expectation; in spite of this concession, the investors still failed to show serious commitment; raising funds locally was obviously a problem, as bank interest rates of 20% and above would make borrowing for such a project a suicidal mission!

On the other hand, much cheaper foreign loans required certain sovereign guarantees that government did not consider necessary. Other investors demanded a free market pricing policy that eliminated subsidies, as the uncertainty and time lag related to subsidy refunds could jeopardise the ultimate success of such ventures. Over the years, fuel importation has risen above 80% of local demand, but government is unable to muster the will to consolidate funds for building new refineries, because of the poor performance and management of the existing ones. Incidentally, the huge import volumes also translated to controversial subsidy values of N1 - 2 trillion in 2011. Consequently, many Nigerians happily welcome the 'Memorandum of Understanding' (M.O.U.), between a partnership of a private United States and Nigerian company with the federal government.

Under this M.O.U., six refineries would be constructed in modular forms within 30 months at a cost of $4.5bn; each refinery would process 30,000 barrels of crude oil per day; thus, the six refineries would process 180,000 barrels of crude oil with total output of 30 million litres of fuel produced daily.  If extrapolations of international fuel consumption patterns are anything to go by, output from these refineries may just be sufficient to meet our domestic needs, and reduce any possibility of scarcity. We recall that a similar memorandum for sourcing of funds for the construction of three Greenfield refineries and a petrochemical plant was also endorsed with China State Construction Engineering Corporation Limited In May 2011; regrettably, the Chinese are yet to move to site.

In view of such antecedent, why should Nigerians be more confident this time around that the new memorandum would materialise in actual construction? Even though the Minister has assured cooperation with the Ministry of Petroleum Resources and the NNPC to ensure the actualization of the projects, the terms of the new M.O.U., endorsed by Segun Aganga, the Federal Minister for Trade and Investments, are not yet in the public domain. Nonetheless, the Nigerian representative of the consortium, Mr. Edozie Njoku, expressed their hope that government would be promptly forthcoming with the issuance of all necessary permits, while Jim Mansfield, the representative of the U.S. firm indicated that the funding for the project will be from a non Nigerian source! One may deduce there from, that the government has no equity in this project. It is not yet clear why the government singled out this new consortium instead of the 20 other licencees for a formal commitment.

In other words, would similar M.O.Us. With the 20 previously licensed investors also have galvanised their actualization of the refineries? We do not also know if the M.O.U. included government commitment to allay concerns on the prompt payment of subsidy. Alternatively, if the terms of the M.O.U. allowed for total export of their refined products, subsidy would be inapplicable, as the owners of the refineries would be free to export their output at more profitable international benchmark prices. Although such a scenario may be perfect for investors, it may not resolve our challenges of constant fuel availability, if subsidy remains in petrol pricing structure. According to Mr. Mansfield, the modular construction process for the refineries, , entails six months of construction work in the US, (including all piping and electrical work), one month for test-running and dismantling the refinery, another month for transportation to Nigeria, and four months to reassemble the plants and commence production.

Regrettably, the local host communities for these refineries and domestic suppliers and contractors would enjoy little or no benefits from such modular construction process; as such contracts and related employment opportunities would be lost to the United States. Besides, most of the income from the successful operation of the six refineries may become domiciled in the U.S., with minimal impact on our exchange rate, reserves, employment generation and ultimately on our economy.

SAVE THE NAIRA, SAVE NIGERIANS!

By Allafrica.com