AFPM '13: HollyFrontier believes North American refiners can share cost edge

By Ben DuBose
Online Editor

SAN ANTONIO -- When industry experts think of key US refiners, HollyFrontier may not be the first name at the top of the list. But over the past few years, they’ve been among the most profitable.

For them, it’s all about the location. HollyFrontier operates five complex refineries with a combined 443,000 bpd of crude processing capacity, with inland operations in the mid-continent, southwestern and Rocky Mountain regions.

As its CEO Mike Jennings explained at Tuesday morning’s industry leadership breakfast, HollyFrontier has leveraged its geographic positions to access cheap-but-landlocked crude oil in the middle of the US.

That gives the company a decided edge over global competitors, Mr. Jennings explained. However, he does believe that advantage can be shared with other fuel makers in the US and Canada – as long as appropriate policy measures are taken.

“HollyFrontier benefits from historically-wide differentials based on our proximity to land-locked oil sources,” he said. “Our entire country, or even continent, has a similar opportunity to realize this differential effect due to great increases that will come from tight oil reservoirs in the US and Canada.”

Proposed infrastructure networks such as the Keystone XL pipeline system could be instrumental in spreading the oil to coastal and other refineries.

“Through an ongoing process of logistics expansion, US refining and chemical plants will provide a viable market for the gas and oil resources,” Mr. Jennings said. “It’s a market that is reliable, easy to access and competitive relative to others around the globe.

“This will take the uncertainty out of downstream economics, thereby creating value for everyone involved,” he added. “I believe this is going to be really exciting to take part in.”

The growth in crude production is already expanding to all three coasts, Mr. Jennings said, with new US production along with barrels from Canadian oil sands providing enormous energy security and giving refineries a great feedstock advantage.

“We can run at high rates, maintain great employment and plan for the future,” he said.

Over time, even if US natural gas rates increase slightly from current levels, Mr. Jennings expects US prices of roughly $5/MMBtu, compared with $11/MMBtu in Asia. That translates to about a $1.75/bbl price advantage on a per barrel basis, he said. Likewise, on the crude side, Mr. Jennings expects an average price advantage of $4/bbl relative to global crude refiners.

Combined, that adds to nearly $6/bbl, he said, which nearly doubles the historical US Gulf cracking margin.

“If our country’s coastal refineries have a very significant cost advantage against whom we’re competing with for export sales, it will have a profound effect in transforming our industry and our country,” Mr. Jennings said.

The catch, if there is one, is that it “depends heavily on government policy that encourages investment on exported products”, he explained.

“The advantages to the consumer of domestically-produced fuels and chemicals coupled with widespread benefits of growing our infrastructure are vital considerations, as is the domestic energy security that comes with it,” Mr. Jennings said.

“The benefits of advantaged feedstocks are intuitive. It leads to higher utilization rates, stable employment rates and high economic returns. Whether exports help with these advantages is subjective, but it deserves consideration.”

From a policy standpoint, the biggest challenge could arise from the transportation fuels marketplace, Mr. Jennings said. Current policies are seeking to raise production of corn-based ethanol for use as fuel, as well as boost the electrification of vehicles via batteries.

Natural gas-based vehicles could also gain traction, but the lack of refueling infrastructure is a “big problem”, Mr. Jennings said.

“Many say it will be big in the next 5 years, but they said the same thing 5 years ago. It will require collaboration between industry and different levels of government to achieve, and that will be difficult.”

Should those “efficient” transportation fuel options expand, it could lead to future rationalization and consolidation within the US refining industry, Mr. Jennings explained.

But refiners must remember that they have a compelling case themselves.

“On the other hand is rising domestic consumption, availability and security,” he said. “I think that will win out. The prospect of an export-driven resurgence in American refining and petrochemical manufacturing is surprising and exciting.”

Going forward, the best way for refiners to make that case is to stay positive, Mr. Jennings said. Instead of using the word “no”, use the word “can”. Make the connection between upstream technology and downstream growth, thereby enabling new developments in areas such as hydraulic fracturing. Note that resources toward domestic consumption can help the 12 million Americans looking for jobs. Promote recent advances in safety.

“Typically, this industry has been defined by others in ways that are inaccurate and wrong,” Mr. Jennings concluded. “It won’t happen overnight, but I believe we can do this in a way that reflects the value we bring to our customers and to the nation as a whole.

“I hope to see you all at the renaissance.”

(Editor's note: This article appeared in Day 3 of the official AFPM conference newspaper, published by Hydrocarbon Processing. To read the full edition, please click here.)

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