Why Biden’s Effort to Increase Refining Is Unlikely to Move Oil Companies

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PHILADELPHIA — As the energy crisis generates record profits at American oil refineries, the owners of what was once the largest such facility in the Northeast have no regrets about demolishing the site.

Hilco Redevelopment Partners has been hauling 950 miles of pipeline from the former Philadelphia Energy Solutions refinery, abandoning the city’s 150-year history of crude oil-to-fuel processing ownership. The company is spending hundreds of millions of dollars to convert the 1,300-acre site along the Schuylkill River into a green, high-tech campus for e-commerce and life science companies.

“I don’t even know how to run a refinery,” said Roberto Perez, chief executive of Hilco, which bought the property in a bankruptcy auction in 2020, a year after a massive refinery explosion rocked the city. “It’s not what we do.”

Oil refineries across the country are being retired and converted to other uses as owners refuse to make expensive upgrades and the US move away from fossil fuels leaves their future uncertain. The reduction comes despite painfully high gasoline prices and as global demand rises amid sanctions on gasoline and diesel produced in Russia, the world’s third-largest oil refiner after the United States and China.

Five refineries have closed in the United States in the past two years, reducing the country’s refining capacity by about 5% and eliminating more than 1 million barrels of fuel a day from the market, leaving the remaining facilities strained to meet demand. However, even at this lucrative moment for what’s left of the refining industry, a White House desperate to lower gas prices is having little success in persuading owners to expand operations, and more closures are imminent.

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The futility of the White House effort came to light in the response to letters President Biden sent this week to the country’s major oil companies, chastising them for squeezing “historically high profit margins” from their refineries. “In times of war, well above normal refinery profit margins being passed directly to American families are not acceptable,” Biden wrote. Biden has threatened to invoke emergency powers if companies don’t lower prices.

Companies do not move. Profits follow years of heavy losses at many facilities after demand fell during the pandemic. Unpredictable changes in oil markets had created a challenging business climate before that. Even in this time of refinery windfall, when the profit margin for every barrel of crude processed has jumped from a dollar or two a year ago to as high as $18 today, investors are hardly seizing the opportunity to enter the sector. They fear the profits will be short-lived. The government’s environmental priorities — as well as growing public and corporate concern about climate change — would render many refineries obsolete in the not-too-distant future.

Building and upgrading the mammoth structures is an expensive and confusing undertaking that can drag on for more than a decade, strain the finances of even the biggest fossil fuel giants and risk being abandoned before the investment is paid back.

“I don’t think you’re going to see a refinery built again in this country,” Chevron CEO Michael Wirth said in an interview with The Washington Post this month.

“It’s been 50 years since we built a new one,” Wirth said. “In a country where the political environment is trying to reduce the demand for these products, you will not find companies to invest billions and billions of dollars in this.”

Some of the country’s 129 refineries are owned by major oil companies such as Chevron, while others are independently operated. At the facilities, crude oil components are separated and transformed into fuel for vehicles and airplanes, as well as industrial oil derivatives, such as lubricants.

The last major refinery to go into operation in the United States, in 1977, is owned by Marathon Oil in Garyville, Louisiana. It is capable of pumping 578,000 barrels a day. Since it opened, more than half of US refineries have closed.

While the Biden administration says market manipulation by oil majors is behind the shortage of refined fuel at the moment, the major fossil fuel companies do not have a monopoly on production. There is a large refining facility in Houston for sale right now.

“If there was anyone out there who believed that this would be a strong business going forward, this is an asset they could buy,” said Jacques Rousseau, managing director of ClearView Energy Partners, an independent research firm.

The problem: nobody wants to buy it. There was not a single viable bid.

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In the absence of any offers, LyondellBasell plans to close its 700-acre Gulf Coast operation by the end of next year. Getting out of the refining business, the company said in a statement, “is the best strategic and financial path forward.” The company did not comment on industry speculation that a fire that toppled part of its century-old Houston facility last week could push back the closing date even earlier as LyondellBasell faces the prospect of costly repairs.

The facility refines around 264,000 barrels of crude oil per day.

“These are old physical plants where steel needs to be replaced, equipment needs to be overhauled, new pumps may be needed,” said Ed Hirs, an energy economist at the University of Houston.

“Getting the equipment you need can take three years. Electric vehicles may already represent 20% of the car market by then. You can invest a lot of money to rebuild a refinery that may not be needed for a long time.”

The White House would have to take extreme measures to force companies to refine further now. That could involve Biden invoking emergency powers to curb exports of refined gasoline and diesel or to force companies to restart idle American refineries, according to a memo ClearView sent to customers.

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The president wrote in his letter that he is “prepared to use every tool at my disposal” to drive prices down, chiding oil executives for making record profits on a refining shortage that is “delaying the impact of historic actions” by the House. White. to face rising gas prices. These actions included releasing 1 million barrels a day from the Strategic Petroleum Reserve and lifting an environmental rule that limited high blends of ethanol to gasoline in the summer.

Analysts warn that any action the White House tries to take to spur more production could backfire. Restricting exports, for example, would intensify fuel shortages in Europe and could lead to further political destabilization there. It could also motivate companies to move more operations abroad, exacerbating the shortage in the United States.

“The problem is that we are operating the existing refineries at full power,” said Jason Bordoff, founding director of the Center for Global Energy Policy at Columbia University. “There is not much capacity to demand that the industry refine more than it already is.”

The case of the closed Philadelphia Energy Solutions refinery illustrates how little influence the White House has over these operations.

The Trump administration worked aggressively to prevent the closure of the plant that produced 335,000 barrels of fuel a day, warning that it played an important role in US energy security and independence. The White House dispatched Peter Navarro, one of Trump’s top economic advisers, to try to help advance a bid from a group of energy executives who planned to rehabilitate the failed facility.

The tender, which had the support of organized labor, failed.

The fire started at a Philadelphia refinery after several massive explosions on June 21. There were no immediate reports of injuries, officials said. (Video: The Washington Post)

The city was emerging from the trauma of a refinery explosion that sent a massive fireball over the area and catapulted large machines across the property. A 38,000-pound fragment of the plant was hurled across the river by the blast. No one was killed, but 3,271 pounds of highly toxic hydrofluoric acid leaked into the community. It can cause lung damage and severe skin burns, according to the Centers for Disease Control and Prevention.

The explosion was triggered by a pipe that had not been inspected since 1973. It was so corroded that the metal in the pipe became thinner than a credit card, according to investigators with the US Chemical Safety Council. The board noted that such corrosion was to blame in previous explosions at refineries in California and Utah, and “it is only a matter of time” before another explosion at a refinery leads to deaths or contamination of a community.

The Philadelphia refinery had already gone bankrupt a year before it was engulfed in fire. New pipelines from the North Dakota region of Bakken and the Permian Basin in Texas have begun pumping oil directly to refineries on the Gulf Coast and Midwest. These refiners could afford to sell their products much cheaper than Philadelphia facilities, which could only access North Dakota and Texas oil through railcar shipments.

Like many of the refineries in the country, the one in Philadelphia was not equipped to process all types of oil. It could not, for example, handle the heavy oil from Canadian tar sands that became available on the market at a low price, driving the Philadelphia facilities into even greater financial desperation.

The refinery was also not equipped to blend ethanol into its fuels, forcing it to buy expensive credits on the open market to meet its obligations under the Federal Renewable Fuels Standard. The price of these credits soared in 2017, creating an overwhelming financial burden.

Facing a city unnerved by the refinery’s public safety risks and immense greenhouse gas emissions, a shaky financial outlook and lukewarm investor interest, advocates of keeping the refinery running found themselves overshadowed by a grand coalition of groups that wanted to turn the page.

“This is a phenomenon that we’re seeing across the country,” said Cary Coglianese, director of Penn Law’s regulatory program. “Neighborhoods are growing around these facilities. There are many people who are not benefiting from the jobs they bring, but who are suffering the risks associated with them. This drastically changes the political playing field.”

Perez, who lives in Chicago, vividly remembers the day one of his colleagues approached him with the idea of ​​buying the refinery. It seemed absurd to him, knowing that cleaning would cost hundreds of millions of dollars, the environmental liabilities are immense, and it would take years to bring down the tangle of pipes and heavy equipment.

“I said, ‘We’re not buying a refinery,’” Perez said. “I don’t even need to see it.”

But Perez was drawn in, and on his visit, he was surprised to find the property on the airport road, close to downtown Philadelphia and next to the harbor. It occurred to him that the highest and best use for a piece of land so strategically located in a city serious about going green was no longer oil processing.

“The community was very excited about our commitment to taking the refinery offline,” said Perez, whose company bought the property for $252 million. “On the first day of closing, we began the effort to roll out 150 years of refining operations here.”

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