The cluster of refineries dotted along the Gulf Coast is advantageous for transporting gasoline and other products to the East Coast, Mexico and South America, but experts are questioning their location in the aftermath of Harvey.
As the number of refineries being shut down increases daily since Harvey started hitting the Gulf Coast and pounding several cities with torrential rainfall and halting access to the plants, relocating the refineries has been raised as a potential strategy to alleviate transportation and environmental issues and lower the risk of another major hurricane or storm causing serious damage.
The refineries play a large role refining crude oil into gasoline, diesel and jet fuel among other products. While the Corpus Christi refineries produce 4.4% of the capacity in the U.S., the refineries in Houston, the fourth largest city in the U.S., and Texas City together generate 12% of refining capacity.
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Building refineries elsewhere in the U.S. is not a realistic option since a massive infrastructure of pipelines, ports and railroads would also have to be constructed, said Suzanne Minter, director of client strategy and energy solutions at S&P Global Platts, a New York-based provider of information and benchmark prices for the commodities and energy markets.
Being located next to a large body of water like the ports in Houston and Corpus Christi is crucial because refineries can operate profitably and gives them easier access to global barrels of varying grades and it allows them export access for refined product, she said.
"The reality is that it takes years to build a refinery and you need access to water and there are literally thousands of miles of crude and product pipelines across the U.S. that support the system," Minter said. "It's illogical to think that we could move all of the refineries. To rebuild everything would be cost and time prohibitive and I would think nearly physically impossible."
Not only does it take several years to construct a refinery, but they are also quite expensive, costing upwards of billions of dollars, Minter said. Since the oil boom of 2012 to 2016 when experts discovered that shale plays could generate copious amount of oil and could be produced cheaply with the aid of fracking, only one refinery has been constructed in North Dakota with plans for another one in the same state.
The last large refinery constructed in the U.S. occurred in 1976. A smaller refinery, the Dakota Prairie Refinery, opened in 2015, but it only processes 20,000 barrels of oil a day compared to the ones near Houston and in Port Arthur which refine anywhere from 112,229 barrels of oil a day at Petrobras's plant in Pasadena, Texas to Motiva's Port Arthur plant which processes 603,000 barrels of oil a day.
The owners, MDU Resources Group and Calumet Specialty Product Partners, sold the plant to Tesoro in 2016, taking a loss since oil prices were low. Tesoro did not disclose the cost of the acquisition, but took on their debt of $66 million. Construction costs ran 40% over and the company spent $430 million, lowering the chances another company would undertake the risk and a potential loss.
Only one plant, the Davis Refinery in North Dakota, is in the planning stages of construction. The plant, owned by Meridian Energy Group, is currently awaiting approvals for permits. When it is fully operational, it would refine 27,500 barrels of oil a day initially and up to 55,000 barrels of oil a day from the Bakken shale play.
Other refinery plans have been shuttered from opposition by environmental groups and residents. As the use of gasoline has possibly also reached peak demand, the viability of building mammoth refineries simply does not make sense, said Minter.
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"It's a nice idea, but I don't see the construction of this magnitude occurring in the next decade," she said. "Do you want a refinery in your backyard?
The odds of North Dakota emerging as behemoth energy hub like Houston are nearly nonexistent, because the state has limited pipeline access to heavy Canadian crude and Bakken crude, Minter said. Using rail to move products out relative to pipelines is too expensive.
"It is not competitive against a refiner who can get supply in or refined product out on a pipeline," she said. "There is minimal demand in North Dakota - you would need truck and rail distances to hit major demand centers such as Chicago and New York."
The devastation which occurred after Katrina in 2005 left its footprint and energy experts wondered about the "wisdom of having so much refining capacity in the Gulf Coast," said Phil Flynn, senior market analyst at Price Futures Group in Chicago.
The potential to build a series of smaller refineries and move away from the "monster" ones in Baytown and Port Arthur, Texas could be possible, he said.
"The smaller refineries could take off some of that oil and it will probably will be in our future," Flynn said. "We have a lot to learn from Harvey since we have never seen this much rain like we did with Katrina."
Meanwhile, here comes Irma.
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