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.
The plant made up 24% of the refining capacity on the densely populated East Coast as of August, the Energy Information Administration said.
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 EIA warned.
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 impacted."
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 said.
"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 is known."
AAA 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 year ago.
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 Massachusetts.
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 said.
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 2010.
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 Northeast.
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 its use.
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 supply."
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 basis.
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 said.
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 2011.
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 efficiency.
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 RBOB standards.
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