Monday, November 30, 2009

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.


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