US quietly loses more refining capacity

Don’t look now, but the total US oil refining capacity fell by 222,500 bbl/day when Valero Energy Corp. announced it was closing its 210,000 b/d Delaware City, Del., installation permanently and Silver Eagle Refining Inc. shut down its 12,500 b/d plant just north of Salt Lake City temporarily.

Silver Eagle’s decision to close its Woods Cross, Utah, refinery came at the suggestion of state regulators and the Chemical Safety Board following the second fire there this year. CSB Investigations Supervisor Don Holmstrom said at a Nov. 13 briefing that its investigation indicated that the plant was operating “with a mechanical integrity program that had serious deficiencies.”

The deficiencies involved pipe thickness throughout the refinery, he continued. Before May 2009, Silver Eagle used one outside contractor to conduct mechanical integrity inspections including thickness monitoring of pipes and vessels, before replacing it with another outside contractor. “Witness evidence indicates that various thickness readings taken by the prior contractor are of questionable validity. The refinery is now in the process of revalidating those readings,” Holmstrom said.

“The evidence further indicates that a significant percentage of the pipes and vessels have no documented thickness readings at all,” he continued. “Refinery managers have now acknowledged to CSB investigators that minimum thickness values for piping and equipment throughout the refinery have been miscalculated. These are the thicknesses at which the equipment must be retired from service due to the potential for failure. Specifically, the refinery has been using what are known as ultimate tensile strength values, rather than the industry-recommended stress tables.

“The result of these miscalculations is that these minimum thickness values may be 3-4 times too low; some of the minimum thickness values may therefore be too low for the safe operation of the equipment. In other words, there is the potential that multiple pieces of equipment have been operating at below the required thickness for safety, and creating the potential for other serious accidents,” Holmstrom explained. He called Silver Eagle’s decision to voluntarily close the refinery to address these issues “a very positive development.”

The Utah refinery’s shutdown is mildly troubling because it involves relatively small capacity which could return once the equipment integrity problems are corrected. The Delaware refinery’s closure is something else again.

In its Nov. 20 announcement, Valero cited “financial losses caused by very poor economic conditions, significant capital spending requirements, and high operating costs” for the move. It said that it remains committed to its northeastern customers and would continue to supply them, partially through higher throughput rates at other Valero refineries.

“The decision to permanently close the Delaware City refinery was a very difficult one,” chief executive William R. Klesse said on Nov. 20. “We have spent the last year diligently trying to avoid this situation, and I have worked closely with [Delaware Gov. Jack A.] Markell in an effort to find a different outcome. Earlier this fall, we shut down the gasifier and coking operations in an attempt to improve reliability and financial performance, but the refinery’s profitability did not improve enough. Additionally, we have sought a buyer for the refinery, but feasible opportunities have not materialized. At this point, we have exhausted all viable options.”

In the fourth quarter of 2009, the company expects to report a $1.7-1.8 billion pre-tax charge, or $2-2.15/share after taxes, primarily from asset impairment, employee severance, and other shutdown costs. Valero estimated that the cash portion of the pre-tax charge would be $125-$150 million. It also projected that the shutdown would reduce pre-tax operating expenses by approximately $450 million, including $125 million of non-cash costs, in 2010 and lower capital spending and turnaround costs by approximately $200 million through 2010. In addition, the company expects to receive $600-700 million of after-tax cash flows next year from inventory sales assuming current prices and other cash benefits from discontinued operations.

“The company’s decision to close the refinery leaves us with several problems to solve. We need to help those hundreds of dedicated workers put their time and talents to work in a way that helps them and their families,” Markell said in a separate statement. “To protect the health and safety of everyone who lives near the facility, we need to ensure accountability for the environmental issues that come from closing a refinery, and we will.” But the impending loss of 210,000 b/d of US refining capacity doesn’t seem to have registered with other politicians who seem more preoccupied with global climate change and energy commodity reform proposals.

Shale gas is part of US-China clean energy accord

It may have been toward the bottom of the list. But US President Barack H. Obama and Chinese President Hu Jintao did include a shale gas resource initiative in their Nov. 17 announcement of measures to strengthen clean energy cooperation between the two countries.

“Under the initiative, the US and China will use experience gained in the United States to assess China’s shale gas potential, promote environmentally-sustainable development of shale gas resources, conduct joint technical studies to accelerate development of shale gas resources in China, and promote shale gas investment in China through the US-China Oil and Gas Industry Forum, study tours, and workshops,” the White House said in a statement posted at its Web site.

The most important of the six other announced actions was a plan to establish a joint US-China clean energy research center to support research and development by scientists in both countries and act as a clearinghouse. It will be supported by at least $150 million of private and public funding over five years, split evenly between the two countries. US Energy Secretary Steven Chu, Chinese Minister of Science and Technology Wan Gang, and Chinese National Energy Agency Acting Administrator Zhang Guoba signed the protocol in Beijing which formally establishes the center.

The other announced initiatives deal with energy efficiency, electric vehicles, renewable energy, clean coal (including carbon capture and sequestration), and energy project cooperation.

The two presidents discussed a wide range of other issues. But each mentioned energy, climate change, and the environment. “As the two largest consumers and producers of energy, there can be no solution to this challenge without the efforts of both China and the United States,” Obama said. “That's why we've agreed to a series of important new initiatives in this area.”

Is cap-and-trade compromise inevitable?

Soon after the Senate Environment and Public Works Committee passed the Kerry-Boxer bill, one of my co-workers asked me by e-mail how the American Petroleum Institute possibly could have reacted as it did. API wasn’t alone, however, in suggesting that the stage now could be set for climate change compromise.

“In some respects, today’s action is more the end of the beginning than the beginning of the end,” Scott H. Segal, co-head of Bracewell & Giuliani LLP’s government relations and strategic communications practices in Washington, said on Nov. 6. “There is still a lot of hard work to do before climate change legislation can pass into law. The final work product of the Congress will need to address cost containment in a predictable and transparent way.”

Concept Capital’s Washington Research Group, in a Nov. 9 bulletin, said that the bill which the Senate committee approved last week despite Republican members staying away from the markup “is unlikely to garner 60 votes in the Senate as-is.” The focus shifts now to five other committees with jurisdiction as well as Sens. John F. Kerry (D-Mass.), Joseph I. Lieberman (I-Conn.), and Lindsay O. Graham (R-SC), it added.

Barbara Boxer (D-Calif.), the Environment and Public Works Committee’s chairwoman, also said following the vote that work now falls to others. Those almost certainly will include Finance Committee Chairman Max Baucus (D-Mont.), who cast the single vote by an Environment and Public Works Committee Democrat against the Kerry-Boxer bill.

All this assumes that Congress is going to pass a climate change bill with cap-and-trade this session, an idea which apparently is embraced more readily inside than outside the Capital Beltway (especially judging by e-mail messages my editors and I have received from OGJ readers). That, in itself, is not necessarily a done deal.

MacDonnell’s election may influence 2011 OCS lease sale

Virginia voters probably had other reasons when they elected Republican Robert F. MacDonnell as their state’s 71st governor on Nov. 3. But their choice could influence whether the US Minerals Management Service holds a scheduled federal offshore oil and gas lease sale off the Old Dominion’s coast in 2011.

Democrat Timothy M. Kaine, the state’s current governor, asked US Interior Secretary Ken Salazar to postpone the lease sale on Feb. 19. MMS put it into the 2007-12 five-year Outer Continental Shelf plan after Kaine signed a comprehensive statewide energy plan into law early in his term.

But the governor said in his letter to Salazar that the law supports “federal efforts to determine the extent of natural gas resources 50 miles or more off the Atlantic shoreline, including appropriate federal funding for such an investigation. Our policies do not support exploration for oil or production of gas or oil, which would be allowed under Lease Sale 220.”

Kaine applauded Salazar’s decision to extend the public comment period by 180 days for a proposed five-year OCS plan which then-secretary Dirk A. Kempthorne launched at the end of July in response to record high crude oil prices. “As I understand it, that five-year plan includes three areas off the Atlantic Coast. I have consistently called for [MMS] to consider the Atlantic Coast as a whole, rather than singling out a particular state for a lease sale,” the governor told Salazar.

“I believe that no lease sale should be conducted in the Atlantic until the process that you have outlined for the five-year program is complete. During that time, I look forward to Virginia being able to continue a dialogue with MMS as we address the challenging issues related to production of offshore energy resources,” he continued.

During his election campaign this year, however, MacDonnell emphasized jobs creation and said in at least one television commercial that a key would be building robust energy industries in the state using all technologies and drawing from all sources, including offshore. It’s too soon to say whether he’ll formally notify Salazar, but the apparent implication is that he prefers having the lease sale move forward.