By BEN DuBOSE
HOUSTON -- The decision for BP to divest two US
refineries on the US Gulf Coast and West Coast (Texas City,
Carson) was made due to a company strategy to prioritize very
close proximity to crude feedstocks, a downstream company
executive said on Tuesday.
J. Douglas Sparkman, president of BP Americas
fuels value chain business for the East of the Rockies region,
said the divestments were made because BP believes being close
to feedstocks is a competitive
advantage over the long-term.
Its not enough for us just to have
assets in a country, said Sparkman, who spoke in the
Geography and Refining panel session at the
IHS CERAWeek 2014 conference. They need to be in the
right location within that country.
Sparkman and other panelists referred to a chart
showing sour coking margins in the US Midwest
running well ahead of sour coking margins on the US Gulf and
West Coast and sweet cracking margins along the US Gulf. While
sour coking in the Midwest has given
refiners a net margin of near $25/bbl, all other margins have
only netted an average of $5/bbl profit in recent months.
This is a play that BP has made, said
Sparkman. We feel there is a long-term persistent
advantage that being close to crude source gives you an
opportunity to get your returns above the
To that point, BP recently completed a multi-year,
multi-billion dollar modernization project at its Whiting refinery in Northwest Indiana, located in relatively close
proximity to those Midwest crudes as well as to the Alberta oil
sands in Canada. The Whiting project concluded with the start-up
of BP's new 102,000 bpd coker in November 2013.
Looking ahead, Sparkman said BP believes the
transportation differential is expected to last.
That refers to the difference in crude cost between the
location where they are produced and after they clear the
In the Midwest, that differential on heavy
crudes ends up being 20-to-25 dollars [per barrel], he
said. We expect this to last.
Panelists also referred to another chart showing an
average 8% return on investment for US refiners over a recent
20-year period from 1990 to 2009. That rate lagged the
comparative number from international refiners, both US and
international exploration and production (E&P) businesses,
and the total petroleum industry as a whole.
For diversified energy majors such as BP, that
number was simply not enough, Sparkman explained.
We all realize that an 8% return is not
sustainable, especially with upstream returns that have much
more, said Sparkman. BP still believes that
downstream is an important cash contributor, and we are
expected to continue playing that role into the future, so we
had to adjust.
Meanwhile, smaller and independent firms are
stepping in to fill some of the void. Bruce Fleming, vice
president of mergers and acquisitions for Tesoro, also spoke on
the panel. He noted that with the majority of US refining capacity now in the hands
of independents rather than oil majors, different strategies
are to be expected.
If youre a global player and you have
other operating divisions like upstream and chemicals and their
returns are more attractive, the strategy is going to be to
shift that capital to more attractive areas, Fleming
said. That trend has been underway with global majors for
quite some time. Specialty operators like Tesoro and emerging
refining players are coming in to pick up the refining assets.
Tesoro, in fact, was the company that actually
bought BPs Carson refinery, located just outside of
Los Angeles. Fleming said he completely understood why BP made
the decision to divest the refinery, given their broad
interests, and why it also made sense under Tesoros more
narrow strategy to acquire it.
Outside of Carson, Fleming also pointed to his
companys Anacortes refinery in Washington as a potential
Its a West Coast refinery, but its not running
West Coast crudes anymore, said Fleming. Its
running a mix of pipeline crudes from Canada and rail crudes
from Midwest. That was a choice that we made at that facility
on how we would play the competition.
With regards to the price spread between WTI and
Bakken crudes, Fleming said that the way the industry responds
will be key. Tesoro is betting on the differential to remain in
place for some time, and is hopeful that logistics can be
arranged to extract those advantaged Bakken crudes to
refineries in different parts of the country.
There will be winners and losers among
competitors, said Fleming. Itll be
interesting to see who has the smart path forward, and right
now its not clear who thats going to be.
The IHS CERAWeek 2014 conference continues
through Friday at the Hilton Americas in downtown