27 June 2008

Refinery economics not subprime crisis affected NLRC plans

NLRC's plans to build a 300,000 barrel per day refinery in Placentia Bay to serve the North American and European markets ran into financial difficulties apparently due to changing refinery economics, not the shortage of capital or other reasons originally offered by NLRC's director Brian Dalton.

In an interview on June 18, NLRC director Brian Dalton spoke to The Independent.

For some reason, the Indy held the interview with Dalton until this week, even though they had it before press time last week. The interview, on page seven of the June 27 issue gives a completely different perspective on NLRC's problems although the Indy story doesn't reflect the importance of what they had. The NLRC story is inside the paper; a front page story quotes the Premier on his recent efforts in Qatar to save the NLRC project and to promote other local energy projects. The front page focuses on trivial issues rather than on the more serious economic ones.

Neither story is available on line, as of June 27.

"Most refiners in North America have not made money in six months," Dalton says, [in The Independent]...

And that would be about right.

In a Canadian Press story that appeared across Canada the same day Dalton gave that interview, MJ Ervin analyst Cathy Hay said that in May 2008, North American refiners were seeing margins of around 10 cents per litre, compared with 28 cents per litre in May 2007. That's also about five to 10 cents below the margins expected during the peak summer months.

A company would "have to take a hard look at the numbers and figure what's going to happen next year. Is this a trend? If it is, your economics may no longer work," said one industry observer who asked to remain anonymous.

Late last week, some media reports were attributing NLRC's financial problems to the subprime crunch in the United States. According to CBC News, Dalton said the refinery project ran into troubles "due to the deterioration of global capital markets."

In March, Dalton gave similar reasons to Bloomberg:

"Effectively, the debt markets are closed at the moment,'' Dalton said. "It's not a pricing issue, it's just a general availability issue.'' The start of construction "depends very much on when the markets open. We're not going to start it unless we know we can finish it, that's for sure."

None of that matches Dalton's comments on tight refining margins, although tight margins would give investors pause before embarking on a $5.0 billion greenfield project aimed at the North American and European markets.

North American markets are likely shrinking owing to changing American consumer demand, even if only in the short term according to the Canadian Press story.

New refining capacity plus the increased use of alternative fuels like ethanol may also narrow global refining margins according to one Wood Mackenzie analyst. Allan Gelder told Bloomberg in April 2008 that he expects tighter margins through 2012.

European refineries are also experiencing tighter margins. That situation isn't likely to change in the short term.

While demand may be continuing in Asia and other parts of the globe, it's difficult to see the logic behind approaching Middle Eastern and Asian investors for the capital to build a refinery on the opposite side of the world from where the refined oil products would be marketed.

ARAMCO is continuing with its plans to invest in new refineries but those are not planned for Europe or North America. One project, in the Red Sea, would be strategically positioned to supply portions of Europe as well as growing markets in the Middle East, Africa and Asia. Another project, cracking Saudi heavy crude, would refine 400,000 barrels per day. It is planned for Saudi Arabia.

Other companies are investing in expansions to existing refineries in Europe, such as one at Wilton, UK.


Update: The Indy front page story is now online but the story with real information in it - the one with Brian Dalton held - for some bizarre reason from the week before - is only in the print edition.