Constipated refineries
Recently, it was reported that PBF Energy is considering restarting some secondary units at is partially-idled refinery in Paulsboro, New Jersey.
When explaining this possibility, CEO Tom Nimbley diagnosed the situation as constipation:
. . as we started to see demand recovery and growing up our utilization, particularly in Delaware to take advantage of the market opportunities, we found ourselves getting constipated, if you will, in Delaware because of the intermediates being transferred from Paulsboro to Delaware when we shut down the cat cracker, the coker, etc. So, what we’re really doing now is we’re starting up a couple of units, not the big ones as Matt said, that is basically going to reduce those transfers significantly, Paulsboro will turn them into finished products. Not a significant increase in clean products production, but some high-value products production and a better capture rate.
Tom Nimbley, Chief Executive Officer, PBF Energy
Nimbley was elaborating on Matt Lucey’s statement:
there are some things we are planning to do on the East Coast with some secondary units that will improve our clean product yield. . . . So, we will be starting up some secondary units, specifically in Paulsboro.
Matt Lucey, President, PBF Energy
Constipated refineries
With some simplification, we can think of a refinery as having a primary part that produces desired yields of different intermediates (like bottoms, diesel, gasoline, lights), and a secondary part that refines their qualities (like ppm sulfur and octane) to capture their high value as 21st Century clean fuels.
At PBF Paulsboro, secondary units will be restarted to upgrade intermediates that are currently being transferred to Delaware into high value finished products. This will relieve the constipation, increase clean product yield and refining margin capture.
In PBF’s case, the net effect of their partial shutdown in 2021, followed by a partial restart in 2022, would then be to reduce total production and increase the ratio of quality producing / yield producing assets.
The Big Squeeze
This aligns perfectly with my theory that the Tier 3 gasoline sulfur specification has triggered the latest episode of a painful quality/yield squeeze in US refineries.
Many US refineries are constipated in the sense they can produce high yields of fuel-grade intermediates but are short the ability to refine them into high margin 21st Century fuels like Tier 3 premium gasoline. This quality/yield imbalance is caused mostly by the continual demand to produce cleaner fuels and it is the true cause of poor capture of the high fuel margins available in today’s market.
The quality/yield imbalance is caused mostly by the continual demand to produce cleaner fuels and is the true cause of poor capture of high fuel margins available in today’s market.
There are many ways to respond to this quality/yield imbalance. Some refiners are doing colostomies, i.e. simply dumping under-processed off-spec material to low margin uses and foregoing the fat margins on finished fuels. PBF has reduced total production and is re-balancing the quality/yield ratio of assets in service. These and many other on-the-fly adaptations work, but they are costly.
A better way for most refiners to increase margin capture is to improve their ability to process fuel-grade intermediates into high margin clean fuels like Tier 3 premium gasoline. This is a readily available, economical solution that few are pursuing.
Doing this would not only increase profit margins, it would also increase the production of 21st century clean gasoline in the USA instead of importing expensive finished gasoline or ultra-low sulfur high octane blend stocks to meet US demand.
But, so far as I know, Tom Nimbley is the only CEO who has acknowledged publicly his constipation problem. Otherwise, the C-Suites don’t discuss this.
Mere compliance or profitable compliance?
On the surface, the new Tier 3 10-ppm sulfur gasoline specification seems to be a non-issue because everyone can comply with it. But that is a false impression. Tier 3 was never an issue from a mere compliance standpoint. The only question was cost of compliance. In the refineries’ insides, there are big, important differences in cost of compliance which range from near zero for some refineries to way over 10 cents per gallon for others. Those afflicted by Tier 3-triggered refinery constipation will continue to feel the pain of lower refining margins and lower stock prices until they implement remedies.
Recommendation
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george.hoekstra@hoekstratrading.com
+1 630 330-8159
