Troublesome Refinery Business Changes Shape As A Result Of Shale Drilling And Natural Gas Boom

Thursday, October 25, 2012 02:14
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Troublesome Refinery Business Changes Shape As A Result Of Shale Drilling And Natural Gas Boom

Tags: oil | profitability | stocks

The refinery business has always been prone to accidents, expensive to run, and low-margin.

 

But shale oil drilling may be changing the business’s previously murky characteristics.

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Five years ago, midsized refinery operations barely eked out any profits at all. Costs were high to ship oil from the Middle East and Africa for refining. It then had to be shipped from the coast to the refinery’s  location.
 
Natural gas prices were high, making refinery operations expensive, too. Today, a Valero refinery in Texas is an example of refineries that are benefiting from a new drilling boom delivering oil at less than international prices.
 
Then there’s the boom in natural gas that has produced a 60% drop in domestic prices over the last four years.
 
That combination has increased profits at the refinery 400% since 2008. The new technology driven boom has also enabled refiners to purchase crude oil at huge discounts to international prices.
 
Refineries along the North Dakota Bakken shale formation particularly benefit because there are not enough pipelines. Railroad cars now connect to the new shale fields.
 
Refineries are investing heavily in new pipeline terminals, storage tanks, and equipment to produce diesel for Europe and Latin America.
 
Before the last couple of years, American crude typically cost 50 cents to one dollar more than international crude. Global gasoline demand is still growing and refineries in Europe and the Caribbean have closed, creating opportunities.
 
Valero’s chairman and CEO says the shift in oil and gas production is the largest over his career, dating back to the Arab oil embargo. The industry is virtually being reborn.

 

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