Wednesday, September 7, 2011

Smaller Profit Margins & Mega Refineries Force Companies Out of the Refining Business (Sunoco, Shell, PBF, Chevron), Higher Italy Bond Yield Pressures ECB to Buy More Government Bonds, Barrick Gold Makes New Discovery

   U.S. gas station operator Sunoco (4,900 stations) officially ended its 117 year old refinery business by putting its last two refineries up for sale (335th bbl/d Philadelphia, 178th bbl/d Marcus Hook). During the last two years the refining business segment showed profit in only two quarters. The last two refineries sold by Sunoco were Ohio's 170,000 b/d Toledo refinery to PBF Energy in December 2010 (third refinery acquired by the NJ based company in 2010 for $400M ($200M cash) with an additional $125M based on future profitability). That was preceded by the sale of Tulsa, OK refinery in June 2009 to Holly Corp. for $65M. The two remaining assets are significant, in 2010 they accounted for about 40% of all refining done on the east coast of the United States.
Sunoco's exit comes amidst declining refinery profit margins (dubbed the crack spread, earnings realized from turning 3 bbls of crude into 2 bbls of gas and 1 barrel of distillate) industry-wide, stemming from higher cost imports (though cheaper shale oil from Canada is helping refineries in the midwest; 74% of gasoline pump prices come from the crude oil itself while refining costs account for about 10%). (Energy Information Administration, US Govt) Profit margins have also been affected by what Royal Dutch Shell calls 'mega refineries' in India, China, the Middle East and Japan that are designed to export. Shell is another major company that has downsized its refining business; In March 2011 it sold the 270,000 bbl/d refinery in Britian to India's Essar Energy for $1.3B, then later in April it announced the closure of its Clyde refinery in Sydney, AUS (the sale comes at a time when Shell is investing billions of dollars in the Canadian oil sands to raise production output and purchasing gas plants: two in Qatar). (Exxon, Shell use soaring profits to buy output growth) Also, BP is trying to unload its 430,000 bbl/d refinery in Texas City, Texas and another in Carson City, California while Chevron sold a 210,000 bbl/d refinery in Pembroke, UK. With the exception of a temporary rise in margins around 2005/2007 they have been in a long term decline, since at least the 1990's. (CNN: Refining more gas won't bring prices down) February 2012 update: Crack spreads are slowly recovering, they were $6.8/bbl in the fourth quarter of 2011 and a number of international refineries responded by increasing capacity. more info at Keystone pipeline rejection creates opportunity
In Canada, an increase of C$1 in the price of a barrel of crude oil raises pump prices by about 0.63 cents/liter with only 0.03 cents of that due to the GST tax (gas taxes applied also vary depending on what part of the country you're in). (March 2010: National Energy Board of Canada-Gasoline Pricing-Energy Facts) In June 2008 taxes accounted for the following proportion of pump prices in these countries: Canada 24%, USA 9.6%, Japan 34.7%, Spain 45.4%,
UK 57%, Germany 59%.
(International Energy Agency)
Also affecting price; Macroeconomic forces increasing the costs of raw material inputs used in production, gasoline demand declining in the Western hemisphere after peaking in 2007 (though Asia is growing). Also to consider; in May 2010 refinery utilization dropped to 87.9% after a glut of supply depressed prices (stockpiles were 6.5% higher than the average since 2005). Refinery profit spread dropped 62% between the 2007 high of around $30/bbl reached on May 17, 2007 and the under $12/bbl on May 24, 2010. Refining crack spread averaged US$28.90 per barrel in the April-June quarter of 2011. (Husky Boosts Production, Profit in 2Q11)
Conditions in the eurozone (specifically Italian bond yields rising again, up to 5.51% on Monday Sept 5 after falling from 6% to 5% when the ECB first intervened) are putting more pressure on the ECB to increase its purchases of government bonds. Initially the ECB was spending at a rate of 22 billion euros per week but that has since dropped to under 10 billion euros. (Politics, markets to test ECB's bond-buying appetite) In Germany the top court ruled that the German constitution does not prevent the country from providing bailouts to eurozone debt laden countries however the court also concluded that Germany must be given more say/power over decisions. Canada's finance minister Jim Flaherty said that Greece would probably have to give up the Euro if it didn't pursue more budget cuts.

Also today,
Barrick Gold, the world's largest producer of gold revealed two new large gold discoveries on its Cortez property in Nevada. What's most striking is that the geology is similar to two of its largest mines. In the last 20 years exploration by Barrick led to the discovery of 140 million ounces of gold.
Pure play natural gas producer/midstream operator Encana sold natural gas gathering/transport assets in Piceance basin, Colorado (500M ft3/d) to a private group for $590M. Encana plans on divesting a total of $2B worth of midstream assets in order to raise funds needed to expand its core business of natural gas, NGL's production which includes the development of its Cutbank Ridge complex in Alberta. About half of that, $1B has already been raised through divestments (of that, $400M has already been spent. March 18, 2011 Encana purchased 30% of a LNG export development in Kitimat, BC).
The CEO of Suncor, Canada biggest oil company by market capitalization appearing on Canada's BNN, stated that Suncor has no plans to exit Syria. Taseko Mines: After rejecting a license proposal on BC's gold-copper Prosperity project, Canada's federal government agreed to have it reviewed again.

No comments:

Post a Comment