All is not rosy for inland oil refineries in North America
All is not rosy for inland oil refineries in North America
Inland oil refineries are like large land animals: they can only survive as long as they have enough territory to support themselves. A shrinking market brings with it a wave of extinction.
Refiners elsewhere have a solution when their domestic market shrinks: exports. But inland refineries face a unique set of challenges when it comes to exports.
Firstly, they may lack the infrastructure to move products to export markets. And even if they do have access to the pipelines or waterways needed to reach the coast, these facilities add extra costs.
Extra costs are a death sentence for export-oriented refineries. The brutal logic of arbitrage economics means no one has pricing power and competitiveness arises solely from low-cost operations.
The International Energy Agency highlighted these issues in its latest Monthly Oil Market Report.
A sidebar on inland German gasoline stocks explores the dilemmas facing German refineries due to their geographic position.
German gasoline stocks have risen by 2.3 million barrels since the end of June and were 1.5 million barrels above the 5-year average by the end of October, according to the IEA.
The agency concluded much of this stockbuild, which has come in the teeth of shrinking German gasoline demand and an unfavorable market structure, is due to the fact that German refineries simply cannot access foreign markets due to logistical constraints.
Ultimately, this situation could prove fatal to inland refineries. The inability to sell all of the gasoline being produced imposes huge costs that can either be tackled by costly investments to reduce gasoline output or through refinery closures.
Yet many refineries will struggle to justify the expense of major capital expenditures when faced with a shrinking market.
Unless market trends change, closures become more likely.
A similar situation could well play out in the Midwestern US.
For now, Midwestern oil refineries are reaping bumper profits, largely because they inhabit a market big enough to support them all.
Indeed, when demand peaks in the summer, the Midwestern market still requires imports of supplies from the Gulf Coast, keeping product prices high even as input costs stay cheap.
But this situation may not last for ever. The market for transportation fuels in the US is declining. Biofuels and efficiency mandates will almost certainly cut into the share now held by petroleum in the regional fuel mix.
Already regional refiners are getting a taste of the future in the so-called shoulder months of the year, when lower fuel demand eliminates the need for imports of gasoline from the Gulf Coast.
Regional fuel prices fall rapidly, wiping out the windfall profits associated with buying cheap crude oil priced off of West Texas Intermediate crude.
This is a situation that will undoubtedly worsen as improved fuel efficiency standards and other conservation measures continue to penetrate the regional fuel market.
As such, Midwestern refiners could well find themselves needing to move some of their production into new markets if they are to continue to operate at full capacity.
Fortunately for regional refineries, some measures are being taken to expand markets.
Sunoco Logistics, for instance, is building a new refined products pipeline system to take an initial 85,000 barrels per day of fuel from refineries in Ohio to points as far east as Pittsburgh in Pennsylvania by early 2014.
But the question remains: will markets expand fast enough to allow the Midwest to continue to support all of the refineries currently operating there?
For those who gain access to infrastructure to export to new markets, cheap crude will probably guarantee a long a profitable life.
For those unable to move surplus fuel to market, a fate similar to inland German refineries looms, especially if competition for inland crude oil begins to erode the price advantage for feedstocks these facilities now enjoy.
Ultimately what is emerging in the US is a series of unintended consequences arising from America’s infamously incoherent energy policies.
Crude oil production is booming just as conservation measures aimed at cutting oil demand are set to really start to bite. There’s no real problem with these two outcomes: rising energy production and lower demand could well give the US a boost through lower energy costs and higher investment.
Except other policy elements are at play here. For instance the Jones Act restrictions on coastal shipping essentially entrench some coastal oil refineries regardless of their competitiveness due to pipeline capacity shortages.
In many ways the shipping restrictions now function as a “tax” on East Coast residents in support of a handful of companies and other vested interests in the US domestic shipping industry.
But ultimately this ban could well prove troublesome for the domestic refining sector as domestic demand contracts.
Similarly, the ban on crude oil exports is probably stunting the growth of pipeline infrastructure that will be needed to efficiently move inland crude oil production to market.
Biofuels mandates originally conceived when oil demand was assumed to be in perpetual growth are set to become increasingly onerous as petroleum demand contracts.
What the US needs is a complete revision of the way it looks at liquid fuels policy in order to ensure the benefits from the shale boom are maximized rather than being captured by a few rent-seeking firms.
This sort of revision seems a long way off. For too long energy policies have been conceived and sold to voters as some sort of panacea for costly fuel. So far there is little sign that an evolution in the debate is in the offing.
— Robert Campbell is a Reuters market analyst. The views expressed are his own.
Gulf companies challenged by debt and rising interest rates
- Debt restructurings on the rise, but below crisis levels
- Central Bank of the UAE has raised interest rates four times since last March
There has been an uptick in recent months in heavily-borrowed companies in the Gulf seeking to restructure their debts with lenders. Although the pressure on companies is not comparable to levels witnessed in the region following the 2008 global financial crisis, rising interest rates will eventually begin to have a greater impact, say experts.
Speaking exclusively to Arab news, Matthew Wilde, a partner at consultancy PwC in Dubai, said: “We do expect that interest rate increases will gradually start to impact companies over the next 12 months, but to date the impact of hedging and the runoff of older fixed rate deals has meant the impact is fairly muted so far.”
The Central Bank of the UAE has raised interest rates four times since the start of last year, in line with action taken by the US Federal Reserve. The Fed has signalled that it will raise interest rates at least twice more before the end of the year.
Wilde added that there had been a little more pressure on company balance sheets of late, although “this shouldn’t be overplayed”.
Nevertheless, just last week, Stanford Marine Group — majority owned by a fund managed by private equity firm Abraaj Group — was reported by the New York Times to be in talks with banks to restructure a $325 million Islamic loan. The newspaper cited a Reuters report that relied on “banking sources”.
The Dubai-based oil and gas services firm, which has struggled as a result of the downturn in the hydrocarbons market since 2014, has reportedly asked banks to consider extending the maturity of its debt and restructuring repayments, after it breached certain loan covenants.
A fund managed by Abraaj owns 51 percent of Stanford Marine, with the remaining stake held by Abu Dhabi-based investment firm Waha Capital. Abraaj declined to comment.
Dubai-based theme parks operator DXB Entertainments struck a deal last month with creditors to restructure 4.2 billion dirhams ($1.1 billion) of borrowings, with visitor numbers to attractions such as Legoland Dubai and Bollywood Parks Dubai struggling to meet visitor targets.
Earlier this month, Reuters reported that Sharjah-based Gulf General Investment Company was in talks with banks to restructure loan and credit facilities after defaulting on a payment linked to 2.1 billion dirhams of debt at the end of last year.
Dubai International Capital, according to a Bloomberg report from December, has restructured its debt for the second time, reaching an agreement with banks to roll over a loan of about $1 billion. At the height of the emirate’s boom years, DIC amassed assets worth about $13 billion, including the owner of London’s Madame Tussauds waxworks museum, as well as stakes in Sony and Daimler. The firm was later forced to sell most of these assets and reschedule $2.5 billion of debt after the global financial crisis.
Wilde told Arab News: “We have seen an increasing number of listed companies restructuring or planning to restructure their capital recently — including using tools such as capital reductions and raising capital by using quasi equity instruments such as perpetual bonds.”
This has happened across the region and PwC expected this to accelerate a little as companies “respond to legislative pressures and become more familiar with the options available to fix their problems,” said Wilde.
He added that the trend was being driven by oil prices remaining below historical highs, soft economic conditions, and continued caution in the UAE’s banking sector.
On the debt restructuring side, Wilde said there had been a “reasonably steady flow of cases of debts being restructured”.
However, the volume of firms seeking to renegotiate debt remains small compared to the level of restructurings witnessed in the aftermath of Dubai’s debt crisis.
Several big name firms in the emirate were caught out by the onset of the global financial crisis, which saw the emirate’s booming economy and real estate market go into reverse.
State-owned conglomerate Dubai World, whose companies included real-estate firm Nakheel and ports operator DP World, stunned global markets in November 2009 when it asked creditors for a six-month standstill on its obligations. Dubai World restructured around $25 billion of debt in 2011, followed by a $15 billion restructuring deal in 2015.
“We would not expect it to become (comparable to 2008-9) so barring some form of sharp external impetus such as global political instability or a protectionist trade war,” said Wilde.
Nor did he see the introduction of VAT as particularly driving this trend, but rather as just one more factor impacting some already strained sectors (e.g. some sub sectors of retail) “which were already pressured by other macro factors.”