ARTESIA, N.M. – Soon after Holly Corp. finished expanding its oil refinery here a year ago, the company’s engineers realized they could push their limits even further than planned.
By next summer, five years of incremental upgrades to the refinery’s vast complex of pipes, boilers and storage tanks will have stretched its ability to produce gasoline and other fuels by more than 40 percent.
Such expansions and efficiency gains are among the few forces propelling the industry today as it tries to keep up with consumers’ seemingly endless appetite for fuel.
The result has been an increasingly fragile oil and gasoline market – susceptible to breakdowns at aging facilities, fuel shortages and higher prices at the pump.
The nation’s last new refinery opened in 1976 in Garyville, La. Since then, environmental restrictions and opposition from communities have helped put a stranglehold on new development.
Increased gasoline imports appear to be the nation’s likely path as U.S. refineries reach limits to their growth.
“We’re close to the top,” said James Resinger, manager of the Artesia refinery, which Holly has owned since 1969. “We’ve just about maxed out every unit that we have.”
U.S. refiners are experiencing strong margins today thanks to a collision of surging demand and limited supplies.
Some experts call it a “golden age” of refining, though history has shown that the cyclical nature of the industry has made it an uninviting place to invest in new projects or even expansions.
“The solutions are always very, very expensive,” said Andrew Clyde, a vice president at Booz Allen Hamilton, a consulting firm.
“They always involve a lot of uncertainty and risk. A lot of companies are unwilling to make those big bets.”
Excess refining capacity throughout the 1980s and 1990s led to plant shutdowns in a brutally volatile and competitive environment. The nation now has 149 refineries, down from 325 in 1981, according to the National Petrochemical & Refiners Association.
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Expansions and other improvements at remaining sites have meant that U.S. refining capacity only decreased 10 percent from 18.6 million barrels a day in 1981 to 16.8 million last year. But over the same period, gasoline demand has shot up 20 percent.
Major oil companies would rather invest in more profitable oil exploration and production. Those that are expanding their refining business, such as Exxon Mobil Corp., are doing so in emerging areas like China, where rapidly growing demand – and better siting opportunities -present more inviting prospects.
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At Holly’s 410-acre complex in Artesia, a town of about 12,000 people in southeastern New Mexico built for the petroleum industry, the company’s Navajo refinery now processes about 75,000 barrels a day of crude oil. It’s expected to add capacity of 10,000 barrels a day by the end of next summer.
To acquire oil for the refinery, Holly’s trucks drive into oil fields – in Artesia and as far as 350 miles away – to collect crude oil in locations where pipelines haven’t been built. Filling a 172-barrel tank on each trip, the company’s drivers average 860 barrels a day of pickups each – trucking in 36,000 barrels of oil a day.
The methodical process – including testing oil samples from storage tanks – can be less expensive than acquiring crude oil through pipelines, which tend to be in higher demand and chronically short on capacity.
“There are so many places you can’t get a pipeline to,” said Bill Welch, manager of the trucking division. “You can’t justify the economics.”
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The fragility of the fuel-transportation system hit home in August 2003, when a Kinder Morgan pipeline to Phoenix ruptured. Prices at some stations there broke $4 a gallon during the crisis, while Holly and other companies leased all the trucks they could find to move gasoline to Arizona markets.
Even with the methodical process of transporting crude oil and its refined products, Holly’s network has become increasingly automated. From a building in downtown Artesia, geosynchronous satellites monitor pipeline flows and storage-tank levels at Holly’s sites across the country.
At the refinery, computer systems run much of the complex, with workers in a control room monitoring performance levels and tweaking procedures as needed.
Holly officials use financial models to watch market prices and change their output of refined products such as gasoline, diesel fuel and jet fuel to take advantage of the most profitable pieces of the business.
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In the last few years, as price differentials rose between light, sweet crude oil and the less desirable sour crude, refiners have added desulfurization equipment to allow them to process more sour crude.
Holly modified its Navajo refinery to allow all its crude to be sour, while also focusing on other improvements to increase efficiency and push output closer toward full capacity.
Resinger, the refinery manager, said the facility may be able to expand its capacity to process as much as 100,000 barrels of oil a day. But growth beyond that runs into limits on permitting and pipeline infrastructure to get the product out, he said.
“You get to a point where your next few barrels are very expensive,” Resinger said.
How long such incremental growth can continue across the industry remains one of the most pressing problems facing U.S. consumers.
“We shouldn’t see too much supply expansion,” said Jacques Rousseau, an analyst at Friedman Billings Ramsey. “These refineries have added on a lot over the course of the last 10 years.”
U.S. gasoline consumption accounts for about 10 percent of all oil used around the world, with little pullback expected from motorists.
With an increasingly tight refining market, experts say that improvements in fuel efficiency may be the only way to protect consumers and the U.S. economy from increased imports and more serious price spikes.
“The bigger issue down the road is, are we as the United States going to be able to get away from the extreme gasoline consumption?” Rousseau said.
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PHOTO (from KRT Photo Service, 202-383-6099): OILPROCESSORS
AP-NY-07-07-05 0619EDT
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