June 22, 2012

TRAINER, Pennsylvania (Reuters) - Delta Air Lines took the keys to the Trainer, Pennsylvania, refinery from Phillips 66 on Friday, becoming the first air carrier to wade into fuel production in a bid to bring down costs. The deal, which revived the shuttered 185,000 barrel-per-day plant and eased fears of a fuel supply shortfall in the U.S. Northeast, was finalized late afternoon, company officials said. Delta subsidiary Monroe Energy, which will run the plant, will start maintenance at the shuttered plant after the July 4 holiday to restart fuel production in the fall, the company said in a statement. Monroe will spend about $100 million to convert the refinery, increase jet fuel output to 52,000 bpd and cut back on production of gasoline. Gasoline demand on the East Coast has dropped in recent years due to more efficient vehicle fuel consumption and modified driver behavior in a weak economy.

Delta hopes the deal will lower its fuel costs, which reached nearly $12 billion last year, the largest expenditure on its balance sheet. The airline paid an average $3.06 a gallon for jet fuel last year, up nearly a third from 2010. The U.S. Department of Energy forecasts the cost of jet fuel will average $3.35 a gallon in 2012. Approximately 400 workers employed at Trainer before it was idled will be brought back to the plant, Delta said. "We have a team of refining experts and proven leaders effectively implementing our strategy at the Trainer refinery," said Jeffrey Warmann, chief executive officer and president of Monroe Energy LLC. Trainer was one of three refineries on the East Coast that was threatened with closure since late last year as the high cost of imported crude that the plants process crushed margins, raising the threat of a fuel squeeze in the region as the summer driving season approached.

Further relief from the threat of shortage may come from a deal for Sunoco Corp to either sell or form a joint venture with private equity firm Carlyle Group LP to run a 330,000 barrel-per-day Philadelphia refinery.

By Chicago Tribune

June 21, 2012:

HARRISBURG, Pa. — Gov. Tom Corbett's proposed tax break of up to $1.7 billion to lure an integrated petrochemical industry to Pennsylvania will get scrutiny in the coming days by state lawmakers eager to ensure that taxpayers get a return on their money and question whether that amount of money is really necessary. Corbett, a Republican viewed as an ally of the state's booming natural gas industry, has touted the tax credit as essential to establishing the largest new investment in decades in a state that has been wracked by the loss of major manufacturers. Details of the tax credit started to become public in recent days as Corbett began to press the Republican-controlled Legislature to approve it before the end of June. With less than two weeks until they leave Harrisburg for the summer, lawmakers are still trying to get a better grasp on the details of what would be the state's biggest financial incentive package ever.

They are uneasy over the appearance of a giveaway to the industry — Corbett is proposing a second straight year of cuts in aid to education and the poor — and some suggest that they'll want to look closely at tying the tax credit to the number of people hired. "The House Republicans have thoughts, we have thoughts, the governor's office has thoughts," Senate President Pro Tempore Joe Scarnati, R-Jefferson, said Tuesday. "So this is quite a process to put out a product that is defendable and yet does what it needs to do. It's quite a process we're going through." Asked Monday how many jobs he thought would need to result from such a tax credit, House Speaker Sam Smith said, "A lot." "I haven't put a number on it," Smith, R-Jefferson, said after being pressed for a number. "I haven't gone that far."

The tax credit is part of Pennsylvania's taxpayer-paid incentives package to encourage a subsidiary of Netherlands-based oil and gas giant Royal Dutch Shell PLC to build a multibillion-dollar petrochemical refinery at a site in southwestern Pennsylvania, and to try to get a chemical manufacturing industry to come with it. Shell's so-called ethane cracker would convert natural gas liquids from the bountiful Marcellus Shale formation to ethylene, which chemical manufacturers can then use to produce chemicals that go into everything from plastics to tires to antifreeze. Shell views the tax credit as a way to help ensure that ethane is abundant and affordable for the life of the refinery, which it says could extend for three or more decades. The worry is that natural gas producers would be more inclined to pipe the ethane from the Marcellus Shale field to Gulf Coast refineries, Shell said in a June 12 letter to lawmakers.

The proposed tax credit — a maximum of $66 million a year for 25 years beginning in 2017 — is calibrated at that level to be offset by new tax collections the industry would generate from the economic activity and jobs it adds to the state, a top administration official said Tuesday. At a nickel per gallon of ethane purchased and used in manufacturing ethylene in Pennsylvania, the tax credit would be proportional to the industry's activity and the resulting collections of new taxes on things like sales and income, said state Revenue Secretary Daniel Meuser. The site of the Shell plant, in Monaca, also would be located in a tax-free zone created for it, although Corbett administration officials won't say what they believe the value of that would be to Shell.

Meuser said he believes 17,000 jobs will result from a full-fledged manufacturing industry around the Shell refinery. Shell has estimated that the core plant could employ more than 400 people. In addition to that, the American Chemistry Council estimated last year that a manufacturing industry around the plant could employ an additional 2,400 people, plus 8,200 more indirectly through the ongoing purchase of supplies and raw materials and 7,000 supported by the spending from the pockets of the state's new employees. The state Department of Labor and Industry is working on its own analysis of the job numbers.

By CBS News

June 21, 2012:

Motiva Enterprises LLC is preparing to keep its new crude oil unit shut for "several months" as it investigates major corrosion problems that have crippled the country's biggest refinery weeks after a massive expansion. In the first public acknowledgment of a potentially long-term outage at the Port Arthur, Texas, plant, Motiva co-owner Royal Dutch Shell Plc confirmed the 325,000-barrel-per- day (bpd) unit was shut due to "corrosion problems," as originally reported earlier this week by Reuters. "The outage of the new crude unit may continue for several months, while the causes of the issue are established and rectified," Shell said in a statement late Wednesday.

Sources said earlier this week the outage, initially estimated at two to five months, could now extend to a year. Shell, which runs the Motiva joint venture with state oil firm Saudi Aramco, said all secondary units built as part of the five-year, $10 billion project were fully operational, although some were running at reduced throughput. Separately, sources familiar with operations said one of the new units -- a catalytic feed hydrotreater that removes sulfur from feedstock going to the refinery's gasoline-producing fluidic catalytic cracking unit -- was being shut down this week because of a lack of feedstock from the idled crude unit.

The sources also said Motiva was shutting an older catalytic reformer, which creates gasoline additives. Motiva officials were not immediately available to comment on details of the secondary unit operations. In the statement, Shell said the refinery's original 275,000 bpd complex was operating "as per plan." Motiva's Port Arthur refinery is not shutting the refinery's FCC, but will emphasize production of diesel, which is yielding higher returns for U.S. refiners as an export, the sources said. The new crude distillation unit, which began production in April and was shut following a June 9 fire, may be idle for up to a year to repair extensive corrosion found in the unit.

By Reuters

June 21, 2012:

Saudi Arabia's unexpected surge in oil exports to the United States this year has fallen into question following a deepening crisis this month at the kingdom's jointly owned and newly expanded Texas refinery. With the huge 325,000 barrel per day (bpd) crude oil unit at Motiva's Port Arthur, Texas, refinery now expected to be out of commission for as long as a year, crippling the biggest plant in the United States just weeks after the completion of a $10 billion expansion project, the Saudis are likely to throttle back U.S. exports that hit four-year peaks in recent months. But a deeper look at detailed import data suggests that any curbs on production may not be as deep as many expect. In fact, a Reuters analysis of government data shows that the 27 percent jump in Saudi shipments in the first quarter was driven by higher sales to a variety of customers, not only Motiva, which the kingdom jointly owns with Royal Dutch Shell (RDSa.L).

The world's top exporter boosted shipments to independent refiners Valero (VLO.N), Marathon Petroleum (MPC.N) and PBF Energy (PBF.N) as part of a 300,00 bpd rise in the first quarter, according to U.S. Energy Information Administration data. Some of that increase was due to unusually low imports in early 2011. But only about a quarter was destined for the Motiva refinery in Port Arthur, according to a Reuters analysis of more detailed data that identifies which plants consume imported oil. The increase in sales to Valero was nearly twice as large. To be sure, the kingdom's state oil firm Aramco must still scramble to rearrange its shipping plans to avoid surplus crude piling up in Motiva's storage tanks or driving prices lower still by reselling excess oil, measures that are almost certain to require throttling back full-on output. An industry source in Saudi Arabia said that Motiva had reduced its orders for deliveries of crude in July but declined to give details on volume. An industry source familiar with Saudi oil policy said production "is likely to be affected.". The bigger question is how these logistical hiccups are affecting oil policy at a higher level.

Saudi Oil Minister Ali al-Naimi has made no secret of his desire to curb $100-plus oil prices in order to provide a "stimulus" for ailing world economies, driving production this year to more than 10 million bpd, near a record high. But now with Brent crude now dropping to less than $95 a barrel, its lowest since early 2011, the disruption at Motiva may provide a useful excuse to tighten the taps without abandoning its commitment to helping restore global growth. "Just a couple of months ago, you had people going 'Oh my gosh, look at all this Saudi crude!'" says Jamie Webster of PFC Energy in Washington. "A lot of it was for Motiva.... Now the question is: Are they going to find 325,000 barrels of customers elsewhere, are they going to have to bring production down, or are they just going to continue to put it in their stocks?" The massive expansion at Port Arthur was shut down in early June just weeks after it was commissioned, due to what sources have said is extensive corrosion in the brand new crude unit. It was first expected to restart operations within two to five months, but sources now say it may be shut for up to a year.

BREAKING IT DOWN

Saudi Arabia shipped 300,000 bpd more crude to U.S. refiners in the first quarter than a year ago, the biggest such year on year rise in a decade, EIA data showed. Imports reached 1.4 million bpd, rising sharply even as a boom in U.S. domestic production and diminished demand reduced overall crude imports to their second-lowest quarterly level since the 1990s. In total, Motiva imported 315,000 bpd of Saudi crude in the first quarter, a 112,000 bpd increase from the year before, the calculations show. Of that, about 250,000 bpd went to Port Arthur, the plant's largest intake since early 2007 and enough to meet nearly all the refinery's pre-expansion demand. But shipments to Port Arthur were up only 74,000 bpd from a year ago, a relatively modest rise that is in many ways logical: Operators would have needed only a bit of extra oil in order to build up additional inventories ahead of commissioning the new units, which didn't begin running until mid-April.

The balance of Motiva's crude imports from Saudi Arabia in the quarter went to its Convent plant in Baton Rouge, Louisiana, which had bought almost no Saudi crude a year ago. The data also shows that Saudi Arabia found other customers ready to increase purchases to a degree not previously known. Valero's imports in the quarter jumped nearly 130,000 bpd to a total 217,000 bpd, the data show. That's a more than 50 percent rise over its average for all of last year, and pushed its intake of Saudi crude to the highest since 2008. Sources familiar with Valero's purchases said that the increase was due to a drop in traditional heavy crude supplies from Latin America and Mexico. First-quarter U.S. imports from Mexico fell 300,000 bpd from a year ago to just 1 million bpd. Marathon Petroleum and Paulsboro Refining -- a unit of independent refiner PBF Energy -- also saw sizeable increases of nearly 40,000 bpd each, the data showed, although that was partly due to a particularly low base. Paulsboro's imports are up by just over 15,000 bpd versus last year's average.

GRAPHICS ON SAUDI SHIPMENTS:

U.S. imports of Saudi crude: link.reuters.com/zyj78s

Saudi crude shipments grow: link.reuters.com/syj78s

TO BE CONTINUED...?

It is not clear whether the same customers have continued to buy Saudi crude at the same rate. Most oil supply contracts are agreed on an annual basis, allowing for some flexibility in the timing of deliveries. Detailed oil import statistics for the second quarter won't be fully available until late August. It is also too early to assess the impact on Saudi Arabia's production. In theory, the kingdom could seek to keep pumping at a near-record rate of around 10 million bpd, hoping to find new customers or pushing the crude into storage.

But storage is running out.

"Saudi Arabia has been showing the world that it is capable at pumping at high levels of above 10 million bpd, and of course not all this oil is being sold -- a lot is going into storage," said Kamel Al Harami, an independent Kuwaiti analyst. Saudi oil minister Ali al-Naimi said back in March that storage inside Saudi Arabia and in its facilities in Rotterdam, Sidi Kerir and Okinawa were already full with around 10 million barrels in stock, leaving the United States as a key sink for millions of Saudi barrels. The extra Saudi shipments amount to a year-on-year rise of around 26.75 million barrels in the first quarter alone. Over the same period, U.S. crude oil stocks rose by 28 million barrels. New weekly EIA data on Wednesday showed U.S. stockpiles unexpectedly rose last week after two declines, pushing stockpiles back toward the 22-year highs they reached in May.

Overall Saudi-U.S. crude exports continued at unusually high levels throughout April and May, with deliveries averaging 1.54 million bpd in the six weeks to mid-June, according to provisional weekly import figures from the EIA. The question is how much of that oil was earmarked for the 600,000 bpd Port Arthur plant, which is now running at half-strength. In late May, as the top brass from Shell and Aramco inaugurated the $10 billion expansion, Motiva President and CEO Bob Pease said the new units were expected to run only heavy Saudi crude for about two months before diversifying supplies. That plan was foiled within days, however, as the new crude unit experienced a glitch on June 3 that forced it to shut down. A week later, following two failed restarts, it was said to be bracing for an up to year-long shutdown. The company has said it cannot say when the unit will be running again.

"All of that (crude) is now going to go into storage and if you fill up storage, then it has to go somewhere," says Chakib Khelil, an oil analyst and former Algerian energy minister.

By Reuters

June 21, 2012

HARRISBURG, Pa. — Gov. Tom Corbett on Wednesday demonstrated that he has deep support from labor unions and business advocacy groups behind him as he presses state lawmakers to approve Pennsylvania's largest-ever taxpayer-paid package of financial incentives for what he portrays as the biggest industrial investment in the state in a generation. He appeared at a Capitol news conference with several dozen union and business group representatives, as well as lawmakers from both parties, in a show of support for his proposal for a $1.7 billion tax break designed to lure an integrated petrochemical industry to a state wracked by the flight of manufacturing jobs in recent decades. Corbett faces lawmakers uneasy over the appearance of an industry giveaway and possibly a suspicious public at a time that his administration is pressing for a second straight year of tax cuts for businesses and cuts in aid for education and services for the poor. "For the general public, that might be hard to understand because ... they think we're giving money to them," Corbett told a news conference. "No, we're not. What we're saying is, 'You build it. You provide all these jobs for all these people and we'll take a little bit less money from you so that we have more money for us.'"

Conservatives have expressed discomfort with the kind of tax break they have opposed in the past, and liberals are angry over this latest idea for a taxpayer subsidy after accusing Republicans of giving the booming natural gas industry a pass on paying their fair share of taxes. Asked whether he believes enough votes will emerge in the Legislature, Corbett, a pro-business Republican who is viewed as an ally of the natural gas industry, singled out a handful of Democratic lawmakers who stood on stage with him. "With some friends from the other side of the aisle here, I think the support will be there," he replied. Still, Corbett suggested that lawmakers will want to change the amount he has proposed — a maximum of $66 million a year for 25 years beginning in 2017. Later Wednesday, Corbett said he had reached an agreement with top Republican lawmakers on a tax credit plan, but would not give details until rank-and-file lawmakers are briefed in the coming days.

The plan is in response to the tentative commitment by a subsidiary of Netherlands-based oil and gas giant Royal Dutch Shell PLC to build a multibillion-dollar petrochemical refinery in the southwestern Pennsylvania town of Monaca, about 30 miles northwest of Pittsburgh. The site of the Shell plant also would be located in a tax-free zone the Legislature created for it, although Corbett administration officials won't say what they believe the value of that would be to Shell. Such a refinery would be the first on the East Coast, and would be fed by the "wet gas" drilled out of Appalachia's bountiful Marcellus Shale formation, which is thought of as the nation's largest-known natural gas reservoir. While Shell has said little about the tax credit publicly, an executive, Daniel Carlson, was in the Capitol on Wednesday for meetings. Details of the tax credit started to become public in recent days as Corbett began to press the Republican-controlled Legislature to approve it before the end of June. With less than two weeks until they leave Harrisburg for the summer, lawmakers are still trying to get a better grasp on the details of the proposal.

Corbett called the opportunity to secure such a project a once-in-a-lifetime chance to usher in "a new industrial revolution in Pennsylvania" that could employ thousands of people. The tax credit is designed to try to get a chemical manufacturing industry to come with Shell, as well as possibly other companies willing to spend billions of dollars to build other refineries. "When I was a young man, 25,000 souls worked in the mills (in Johnstown), high-paying jobs," said Sen. John Wozniak, D-Cambria. "The city was filled with stores, department stores, restaurants. I can tell you right now, if you never experienced the loss of manufacturing jobs, you have no idea of its impact. This is an opportunity to bring manufacturing back to Pennsylvania. For those that lived in Beaver County, Pittsburgh, Johnstown, Bethlehem, they know the importance of these manufacturing jobs."

Shell's so-called ethane cracker would convert natural gas liquids to ethylene, which chemical manufacturers can then use to produce chemicals that go into everything from plastics to tires to antifreeze. Shell views the tax credit as a way to help ensure that ethane is abundant and affordable for the life of the refinery, which it says could extend for three or more decades. The worry is that natural gas producers would be more inclined to pipe the ethane from the Marcellus Shale field to Gulf Coast refineries, Shell said in a June 12 letter to lawmakers. The proposed tax credit is calibrated at that level to be offset by new tax collections the industry would generate from the economic activity and jobs it adds to the state, administration officials say. At a nickel per gallon of ethane purchased and used in manufacturing ethylene in Pennsylvania, the tax credit would be proportional to the industry's activity and the resulting collections of new taxes on things like sales and income, Revenue Secretary Daniel Meuser has said.

By CBS News