“It was the best of times; it was the worst of times . . . “
Those first 12 Dickensian words from “A Tale of Two Cities,” written some 159 years ago, could appropriately describe the paradox in North American refining this autumn. But this time, the differences in class and privilege are tied to the unique geography that separates the haves and have-nots in what may be the greatest diversity in refining this continent has ever witnessed.
The have-nots are the light sweet crude oil refiners on the coasts, whether they process crude along the Delaware River, the Mississippi or the Houston Ship Channel. The haves -- and there are some with a serendipitous largesse never anticipated -- lie in the U.S. near the Canadian border and can run crude oil blends that carry cheap asking prices common in previous generations, but which trade at unprecedented fractions of global benchmarks.
For a refiner like Flint Hills at Pine Bend, Minn., autumn 2018 has indeed represented the “best of times.”
Consider that there were countless deals around mid-October for heavy sour crude out of Alberta, Canada for under $25/bbl, even as the price of the global Brent benchmark remained above $80/bbl. The closest thing to a Canadian heavy sour benchmark is Western Canadian Select (WCS) and OPIS estimates that the grade sold for an average $42.50/bbl below WTI futures in the first half of October. That included some days where distress deals were consummated at $50/bbl beneath WTI, in essence representing a buy one/get one free market that lacks precedent.
But for our comparative “two cities” purposes, OPIS estimates that an average FOB price for WCS was $31.30/bbl in the first half of the month, resulting in delivered prices of about $35/bbl for the Pine Bend refinery. That facility can run about 340,000 b/d of crude and consultants say that its complex and sophisticated equipment allows it to run some of the “most gnarly heavy crude that comes from the Oil Sands.”
Refineries that are close to major metropolitan areas are especially blessed, and Pine Bend has a robust Minneapolis market in which to “clear” its product. OPIS rack averages for the first half of October measured the average price of diesel at $2.57/gal; No. 1 oil sold for $2.808/gal; and rack gasoline (backing out the ethanol component) fetched about $2.20/gal.
When the feedstock cost is subtracted from the per-barrel numbers for the transportation fuels, it suggests that Flint Hills made about $62.94/bbl on diesel; $82.93/bbl on No. 1 oil; and $57.40/bbl on gasoline.
Heavy sour crude also results in some undesirable products like asphalt, petroleum coke and residual fuel, but under any circumstances, Flint Hills probably made more money in a half month than some sweet crude refiners manage to collect in a year. The facility, in the view of many consultants, is quite probably the most profitable refinery in the world.
October, however, has represented the “worst of times” for light sweet crude refiners on the Lower Mississippi River, near New Orleans.
The pain those refiners have experienced in October has been uneven. Processors with midstream deals to bring in discounted WTI from Midland didn’t suffer as much as New Orleans-area refiners more dependent on Light Louisiana Sweet (LLS) crude and other domestic or offshore foreign sweet blends.
A Tale of Two Cities: Refinery Margins at Pine Bend, Minn., and New Orleans, La.
|Pine Bend, MN||
New Orleans, LA
|1H Oct. Crude Cost||$35.00 bbl||
|Gasoline Price (CBOB)||$92.40 bbl||
|Gasoline Crack||$57.40 bbl||
$ 3.09 bbl
|Diesel Price||$107.94 bbl||$98.13 bbl|
|Diesel Crack||$62.94 bbl||
|No.1/Jet Price||$117.94 bbl||$96.59 bbl|
|No.1/Jet Crack||$82.93 bbl||$14.46 bbl|
The pain deepens when prices for the marquee product – gasoline -- are considered.OPIS estimates that the average premium to WTI futures for LLS barrels at St. James, La., storage this month has been $8.30/bbl. Adding that to the first half October WTI average of $73.83/bbl yields a cost at St. James of $82.13/bbl. Quality differences aside, the cost of crude in our chosen second city are about 135% higher than the cost of crude at Pine Bend.
The New Orleans market can be measured by the spot prices for transportation products that get injected into the Colonial or Plantation Pipelines. OPIS data for the first half of October calculates an average price of just $2.029/gal for CBOB, or about $85.22/bbl. That makes for an average crack of just $3.09/bbl for gasoline, and when RIN compliance costs are factored, the gross margin shrinks by another 80cts/bbl or so. Actual operating costs are at least $3/bbl, so even the most efficient operators in the region have lost money on gasoline output this month.
Distillate has offset some of the gasoline losses. The average first half October diesel price was $2.3363/gal, or $98.13/bbl and jet fuel sold at an average $2.2998/gal, or $96.59/bbl. Still, the respective gross margins for those two products of $16/bbl and $14.46/bbl are about one fifth of the gross margins for Flint Hills at Pine Bend.
The span between worst to first, or from the penthouse to the outhouse in the North American refining business means that the industry is hardly monolithic, and it puts tremendous pressure on analysts to sift through more granular data.
- NYMEX or ICE “cracks” can be rendered meaningless by the diversity in the regional markets. There is very little correlation between these futures indices at a time where one crude oil blend (Brent) can sell for three times the price of another (heavy sour Canadian).
- There are two “Americas” in refining. Flint Hills’ great run at Pine Bend is a proxy for other PADD2 and PADD4 refineries who are seeing a Midcontinent renaissance that hasn’t been witnessed since the oil export ban. Meanwhile, coastal plants are seeing one of the most miserable profit environments on record for gasoline, and can only hope that distillate returns continue to pay the bills.
- Valuating North American refineries is a tricky business. One wonders what a refinery like St. Paul Park (now owned by Marathon) would fetch thanks to its cheap crude source and solid local refined products demand. OPIS was never able to corroborate wire service reports that indicated ExxonMobil’s Billings, Mont., refinery was up for sale, but that asset would command a handsome number thanks to its proximity to cheap Canadian crude.
- How long can global gasoline continue to trade at a discount of $12-$15/bbl to distillate? Some traders believe that diesel’s premium to gasoline could double from current levels if there is a cold winter and if IMO concerns pump up the price for the middle of the barrel. Whether it’s a simple or complex refinery, it’s impossible to make diesel and jet fuel without manufacturing gasoline, which is now regarded as the weak sister in the fuels slate.
- Gasoline has never been more bipolar than it is these days, and planning one’s refining operations are a crapshoot. Diesel and jet fuel have delivered consistent profits for about five years, while it’s feast or (current) famine for plants that depend on market whimsy for motor fuel.
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