By DAVID BIRD
Prices of ultra-low-sulfur diesel fuel - already at record
highs for this time of year - could spike higher if Sunoco goes
ahead with plans to shut its 335,000 bpd Philadelphia refinery
in July if no buyer is found, US government forecasters warned
in a report.
plant made up 24% of the refining capacity on the densely
populated East Coast as of August, the Energy Information
Since September, ConocoPhillips shut its 185,000 bpd
Trainer, Pa., refinery and Sunoco shuttered its 178,000 bpd
Marcus Hook, Pa., refinery.
Those refineries, plus the Sunoco Philadelphia plant, make
up 50% of East Coast refining capacity.
Additionally, Hovensa, a 350,000 bpd joint venture refinery operated by Hess and
Venezuela's state owned Petroleos de Venezuela, which supplied
refined products to the East Coast, was shut last week.
"To date, the market transition following the closing of two
Philadelphia-area refineries in September and December 2011 has
been relatively smooth, but the situation could change," the
The closures have been partially offset by the startup of
PBF Energy's 182,000 bpd Delaware City refinery in October
2011, which had been shut down in late 2009 by Valero before
its sale to PBF Energy, the EIA said.
"However, if Sunoco's Philadelphia refinery, which alone
accounted for nearly a quarter of refinery capacity on the East
Coast in 2011, were to shut down in July 2012, petroleum
product markets in the Northeast could be significantly
While refining capacity outside the East
Coast exists to replace the idled capacity, "transportation
constraints may hinder the delivery of products to the
Northeast in the short term," the EIA said.
"Ultra-low-sulfur diesel fuel [ULSD] will be the most
challenging product to replace as there are few alternative
supply sources outside of the US Gulf Coast.," the EIA
"Transportation constraints may also hamper the movement of
all replacement products through Pennsylvania and into western
New York, areas currently supplied by pipelines originating in
the Philadelphia area refinery complex.
The industry may not be able to overcome all of the
logistical challenges in the Northeast for a year or more, as
infrastructure changes will be necessary to accommodate the
changing product flows.
"If the Sunoco Philadelphia refinery closes, price impacts
are highly uncertain," the EIA added. "If areas cannot be
adequately supplied in the short term, prices can spike. In the
longer run, higher prices and possibly higher price volatility
can result from longer supply chains.
The potential loss of the Sunoco Philadelphia refinery
presents a complex supply challenge, and no single solution has
been identified by industry participants that will address all
of the logistical hurdles that must be overcome."
The agency said: "The industry will have a financial
incentive to serve all markets in the Northeast, and companies
are currently investigating options. However, companies are not
likely to make significant investments in new logistical
arrangements until the status of Sunoco's Philadelphia refinery
said Monday that nationwide diesel fuel prices hit $4.03/gal,
nearly 17 cents higher than a month ago and up 33 cents from a
EIA data show prices are at their highest-ever levels for
this time of year.
The Energy Department holds 1 million bbl of ULSD in the
Northeast heating oil emergency reserve in Connecticut and
EIA said the Colonial Pipeline, which moves more than
500,000 bpd of gasoline and distillate fuel (diesel and heating
oil), from the Gulf Coast refining belt to the New York Harbor
region, is running near capacity and could boost supply to the
Northeast this summer by no more than 100,000 bpd.
That is "well less than the expected production shortfall if
the Sunoco Philadelphia refinery is closed."
"The largest logistical hurdle is the lack of terminal and
pipeline connections to move products from waterbourne vessels
into the product distribution system that current supplies
areas through Pennsylvania and western New York," the EIA
Ports serving the Philadelphia-area refineries and tanks are
configured to handle crude oil, not products, although
conversion work is underway at an area plant that was closed in
But even those changes would be inadequate to replace the
supply from the three Philadelphia refineries.
EIA said capacity to move products into these regions by
rail is limited and cost of trucking oil from New York Harbor
to Pittsburgh could add at least 20-30 cents/gal to costs.
ULSD consumption in the Northeast U.S. was about 360,000 bpd
in 2008, the EIA said, but after dips linked to the economic
slowdown, it is set to "increase considerably.
"The State of New York is requiring the use of cleaner
burning ULSD as heating oil, beginning in July, leading a
change taking place in coming years throughout the
Heating oil use in New York has averaged around 70,000
barrels a day, but seasonal winter spikes lift demand to as
much as 170,000 barrels a day.
About 61% of ULSD used in the region comes from local
refineries, with 28% coming from other regions and net imports
accounting for the rest.
Closure of the Sunoco Philadelphia plant would require
90,000 bpd of additional ULSD supply for the region in 2012 and
180,000 bpd in 2013, the EIA said, with only a portion of the
gap closed by a drop in regional exports.
"Imports of ULSD are not expected to increase," because foreign
sources of the fuel are limited, as not many countries require
Europe, which uses the fuel, is a net importer.
The Gulf Coast is the most likely source of additional
supply, but faced pipeline capacity constraints and a
requirement to use Jones Act tankers "which may be in short
The 1920 Jones Act requires that all commercial shipping
between US ports must be performed by US flag vessels
constructed in the US, wholly owned by US citizens and crewed
by US citizens and permanent residents.
Penalties are steep for non-compliance. EIA said just 56
tankers met the requirement at the end of 2010, less than 1% of
the world tanker fleet in total number and on a tonnage
About 35 Jones Act tankers are in use at any given time, EIA
said. The costs of using Jones Act ships seem to run
two-to-three times foreign flag ship rates," the EIA said.
"In the absence of domestic tanker constraints, Northeast
suppliers probably would find it more economic to purchase ULSD
from the Gulf Coast than to bid it away from Europe," the EIA
But because of low availability of Jones Act ships, ULSD
buyers would bid the fuel away from European purchasers, paying
market prices that are 5-15 cents/gal higher, as well as
transportation cost of that averaged 5 to 9 cents/gal in
Gasoline use in the Northeast peaked at 1.66 million bpd in
2005-2007, but fell to 1.54 million bpd in the first 11 months
of 2011 due to the recession, high prices and increased vehicle
Ethanol blending into gasoline as risen to 10% from 2% in
2005, reducing petroleum-based gasoline consumption by 250,000
bpd in the region.
Despite the refinery closures, supplies of
reformulated gasoline blendstock, or RBOB, that is mixed with
ethanol to make finished gasoline "probably will be able to
match demand," as a number of foreign suppliers can meet US
Still, the region could face a test of meeting supply in
2013 during the switch from winter-grade to summer-grade fuel,
if the Sunoco plant shuts as planned.
Dow Jones Newswires