Shell And Saudis Shell Out For U.S. Refinery
Lionel Laurent, 09.21.07, 12:00 PM ET
LONDON -
Anglo-Dutch oil major Royal Dutch Shell and Saudi Arabia's national player Saudi Aramco announced on Friday the $7 billion expansion of a key refinery in Port Arthur, TX, which will make it the largest in the U.S. The investment is an attempt to squeeze more value out of Shell's lucrative assets, following the sale of smaller operations in Europe and the U.S.
The Port Arthur refinery currently has a capacity of 275,000 barrels of crude oil per day, but the expansion will increase this to 600,000 barrels, the largest in the U.S. and one of the largest in the world. The added capacity will be ready by 2010.
Royal Dutch Shell's A shares slipped one penny (2 cents), or 0.05%, to £20.91 ($42.14) during midday trading in London on Friday. Its B shares gained 2 pence (4 cents), or 0.1%, to £20.92 ($42.16). The two share classes have identical voting rights, but B shares allow for certain tax benefits when claiming dividends.
The expansion will cost an estimated $7 billion, with Shell and Saudi Aramco sharing the costs as part of their 50-50 joint venture, Motiva, which is headquartered in Houston. Motiva operates two other refineries in Louisiana and supplies nearly 7,700 Shell-branded retail outlets along the Gulf and East Coasts.
But capital costs in the oil industry have increased dramatically, in part because of the rising price of oil itself, which generates more appetite and competition for raw materials and investment. The Port Arthur project's latest cost estimate is almost double last year's projected figure of $3-$4 billion.
"One of the challenges is to actually complete this expansion at the projected cost," said David Stedman, analyst with Daiwa Institute of Research. "Costs, as we know, have been escalating over the past few years. The availability of the engineering resources and manpower is not as easy as it was five years ago."
Shell said it was "confident" that it would meet its $7 billion cost estimates. "There's been a lot of pressure on us the last few months," said Rob Routs, Executive Director of Downstream for Shell, referring to the need for reliable cost projections. He added that the investment had been delayed "quite a bit" in order to get a handle on the numbers.
Although the investment is a clear commitment to expanding refinery capacity in the U.S., Shell has been offloading assets at the same time to achieve economy of scale. In 2005 the company sold its Bakersfield, Calif. refinery to Flying J for a reported $130 million, and last month sold gas and oil interests in Norway to E.ON for $893 million.
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