(EnergyAsia, May 19 2014, Monday) — While many refiners in Europe and Asia are struggling to stay afloat, their North American counterparts are profiting from sustained high margins brought on by an unexpected prolonged period of low domestic crude feedstock cost, said the US Energy Information Administration (EIA).
The agency said 2013 was the third year in a row that North American refineries reported “considerably higher profitability” than their European rivals as measured by earnings per barrel processed. In Asia, Australia’s refiners are shutting down unprofitable plants or converting them into storage terminals while Singapore, the region’s refining hub, has been integrating its refineries into petrochemical complexes.
While many factors contribute to refinery profitability, the EIA highlighted the role played by lower North American crude oil prices.
“North American refiners’ earnings per barrel processed were more than US$7 per barrel higher than their European competitors in 2013, based on an analysis of 26 energy companies with refinery operations that submit financial and operating information by segment in annual reports to the US Securities and Exchange Commission,” it said.
In a recent analysis, EIA compared 13 companies based in North America and 13 in Europe. Ten of these companies have nearly all their refinery throughput in North America, 10 others have nearly all their throughput in Europe, and six have refineries throughout the world.
Total earnings in the refining segment for each grouping was divided by its total annual refinery runs to estimate earnings per barrel processed. The scale of refinery runs varied widely across the companies in the sample selected, with 59,000 b/d being the smallest and 4.6 million b/d being the largest in 2013.
Earnings in the refining segment ranged from a loss of almost US$2 billion for one company to a profit of US$4.3 billion for another. Total refinery throughput for these companies averaged 25.6 million b/d in 2013, approximately 56% of total OECD liquid fuels consumption.
Refining profitability across the three groupings tended to move together during the 2004-10 period. European and North American refineries benefitted from a broad increase in gasoline and distillate prices from 2004 to 2006, with profitability falling during the 2008-09 financial crisis.
However, as the global economy recovered after 2010, many North American refineries benefited from relatively lower prices for two key inputs, crude oil and natural gas. Increasing production of both crude oil and natural gas contributed to lower feedstock costs in North America compared to international prices.
As North American crude oil production increased from new tight oil plays, US imports of crude oil steadily decreased. Production increases since 2011 led to bottlenecks in the Midcontinent, depressing US average refiner acquisition costs compared with Brent (North Sea), with discounts averaging more than US$9 per barrel from 2011 to 2013. This crude discount tended to benefit companies with refineries in the interior of the US and Canada.
In 2013, Gulf Coast refiners began to see increased earnings because of lower crude costs after some of the infrastructure bottlenecks to move crude oil to the Gulf Coast were removed and prices of Light Louisiana Sweet (LLS) crude began to trade at a discount to Brent product prices in North America, however, continued to be driven by international crude oil prices and petroleum product markets. Crack spreads, the difference between the purchase price of crude oil and the wholesale selling price of refined products, on the Gulf Coast increased in late 2013, and have remained high in 2014.
North American refineries have been able to run at relatively high rates because their crude oil and natural gas costs were low and global product prices remained high. Refinery runs for North American companies rose 27% from 2010 to 2013, while the European companies’ refinery runs declined 11%. The result was an increase in product exports, particularly from the US Gulf Coast. As US refineries increased runs to produce distillate, they also produced more gasoline and have taken some market share from Europe in Latin American and West African markets.
In 2014, US crude prices remain discounted to Brent. Additionally, relatively cheaper natural gas prices in North America continue to provide US and Canadian refineries with further energy feedstock price advantages compared with refineries in other parts of the world. Preliminary financial results from the first quarter suggest that North American refiners are maintaining higher profitability than their European rivals.