High gas prices threaten U.S. refining output
New York |Reuters | 13-12-00
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A spike in U.S. natural gas prices, which has already battered consumers across the nation, could have a more wide reaching effect by cutting into oil refinery production, analysts said yesterday. This threatens to reduce the amount of gasoline and heating oil produced, despite low spare supplies and sky high prices.
Refiners, who typically use natural gas as a boiler fuel to power their plants, are already beginning to switch to cheaper liquefied petroleum gas (LPG) products like propane and butane in order to keep operating costs down. But those products, derivatives of natural gas, are expected to become more expensive as well, leaving companies with no cheap alternatives and dragging margins in refining centres such as the U.S. Gulf Coast, into the red. "The high natural gas prices could reduce refinery runs by a significant amount," said a source at a large Gulf refining company, who asked not to be named.
"The natural response of merchant refiners confronted with shrinking margins and increasing natural gas costs is to cut runs," said industry analyst Phillip Verleger in a report. Natural gas prices on the benchmark New York Mercantile Exchange (NYMEX), have doubled since the start of November to a peak above $9 per million British thermal units - quadruple the price at the start of this year.
The high prices for natural gas, combined with cold weather in the Midwest, have led to a spike in propane demand among consumers and refiners seeking cheaper fuels, and to the allocations of two major propane-carrying pipelines. Although lagging behind the gas hikes, propane and other LPG prices are already near all-time highs after jumping 70 per cent in the last six months with analysts warning the trend can only boost them even more.
The No 2 U.S. independent oil refiner Valero Energy Corp said that high natural gas prices have led it to use propane and butane at its California and Texas plants as a way to reduce operating costs. Valero said it has not decreased runs. Many other companies declined comment. A decrease in refinery production could mean another obstacle to healthy winter heating oil supplies in the Northeast and could spell yet another run up in gasoline pump prices this spring.
The use of butane as a boiler fuel can also reduce gasoline output at a refinery, since many producers use butane as a blendstock during the winter months. Valero said its gasoline output has not suffered. Meanwhile, industry watchers are keeping a wary eye on refiners, especially in the Gulf Coast, where margins are already low and are under the greatest threat to rising operation costs. Margins on the Gulf, which accounts for roughly half of U.S. production, were at break-even in early December, but recovered slightly last week to $3.65 for every barrel distilled due to a slide in crude oil prices, according to Paul Ting, analyst for Salomon Smith Barney.
But "refining margins may weaken before staging a rebound" since last week's oil price drop is likely to have a short-lived effect, said Ting in his weekly report. The huge run-up in U.S. natural gas prices - more than double since August - has also lent further momentum to the prospects for increased use of liquefied natural gas (LNG), traditionally just a fraction of overall U.S. gas use due to high prices and safety concerns.
"I think without question these prices we've seen have made LNG a lot more attractive," Paul Sankey, an Edinburgh, Scotland-based analyst who follows the global LNG market at Deutsche Bank Alex Brown, said. "According to our benchmark, New York Mercantile Exchange (NYMEX) gas prices above $3.50 per million British thermal units (mmBtu) and well above that are highly profitable," he said, adding his current price forecast of $3.40 in 2001 was still close enough for LNG to be attractive. The $3.50 threshold must be cleared before LNG, given its high processing and transport costs, is a viable and profitable alternative to traditional natural gas.
LNG will likely remain a small per cent of overall U.S. gas consumption, but its projected rise - with some industry forecasts seeing it up to 5 per cent of overall gas use in the next decade - will fill the gap at the margins, especially in areas like New England, one of the largest users of gas and LNG in the U.S. Deutsche Bank said it expects U.S. LNG supply to rise around 63 per cent over the next five years from 190 billion cubic feet (bcf) in 2000 to about 310 bcf by 2005. This forecast could go even higher if demand forecasts are met and no constraints, like a tanker shortage, develop.
Since late August, wholesale gas prices at Henry Hub in Louisiana, the benchmark U.S. delivery point, have more than doubled to $9.90 per mmBtu. For 2000, Hub prices are set to average a record $4.00, up from the $2.35 in 1999. And many industry forecasters predict average wholesale prices in 2001 between $4.00 and $5.00, especially if a cold winter drains supplies ahead of the summer, when gas demand typically peaks. LNG's costly liquefaction process involves super-cooling and injecting gas into spherical high-pressure tanks for onshore storage or shipment on board special LNG carriers, whose tanks typically hold the equivalent of 2.8 bcf of natural gas.
Algeria, Trinidad, Nigeria and Qatar have been among the largest exporters of LNG to the U.S. in recent years, according to the Department of Energy's Office of Fossil Energy. While LNG use is likely to continue rising in coming years, the industry has challenges in delivering its product safely. Pressurizing gas makes it economic to transport by ship, but it is also potentially very dangerous, since gas is so volatile and LNG tankers carry so much of it. The nascent industry was all but shut down for two decades following a devastating blast at a Cleveland terminal in 1944. The accident, the worst ever for the industry, killed 128 people and incinerated an entire neighbourhood.
But since then, improved procedures for handling and shipping LNG, with carriers having to approach their terminals using special shipping lanes and usually under Coast Guard escort, have cut some of the risks associated with the highly explosive fuel. LNG imports, worth $1.2 billion a year, account for only about one per cent of overall U.S. gas consumption. But this figure distorts its regional importance, especially in New England, which is one of country's largest users of gas. In 1999, for example, the terminal at Everett, Massachussetts, near Boston, took in about 96 bcf of LNG, nearly 17 per cent of all gas used in the region, more than double what it used in 1998 and about two-thirds of all LNG used nationwide, according to the Energy Information Administration (EIA).
LNG cargoes at Everett, currently operating at around 65 per cent capacity, are expected to rise about 5 per cent this year and to 20 per cent in 2001 to 115 to 130 bcf, according to Distrigas, Everett's operator and a subsidiary of Cabot LNG. Cabot LNG, a unit of Belgian-based energy services company Tractebel, has also begun plans to double the import capacity at Everett by 2002. In the Southeast, CMS Energy Corp, which operates the only other active U.S. LNG terminal in Lake Charles, Louisiana, is expected to import more than twice the cargoes of LNG this year, according to a spokesman.
The jump to 55 LNG cargoes, or around 150 bcf, this year at Lake Charles is more than double the 27 imported in 1999 and up from 17 cargoes in 1998. The two other U.S. LNG import terminals, in Cove Point, Maryland, and Elba Island, Georgia, idled years ago for lack of demand, are expected to reopen in two to three years, a move that would put all four of the country's LNG terminals back to work for the first time since 1982. |
