Refiners Profit as Green Rules Pump Up US Gasoline
Date: 25-May-04
Country: USA
Author: Joseph Giannone and Richard Valdmanis
"Things have worked out well for the refiners," said Jacques Rousseau, analyst at Friedman Billings Ramsey.
The U.S. Environmental Protection Agency this year cut the maximum amount of sulfur allowed in gasoline by more than half in a bid to improve air quality - a move that drew fire from the refining industry due to the high cost of refinery upgrades.
Meanwhile, states like New York, Connecticut, and California banned a widely used fuel additive, MTBE, for its tendency to pollute drinking water, further Balkanizing the U.S. gasoline market.
The tougher regulations may have been derided by oil companies, but refiners are now reaping big profits because the rules have made it more difficult for foreign suppliers to ship to the voracious U.S. market.
"U.S. refiners are becoming the beneficiaries of some very high profit margins because of the high prices now required to attract foreign cargoes," said Mike Burdette, analyst for the U.S. Energy Information Administration.
The average price of regular gasoline in the U.S. has surged by about 50 cents this year to a record $2.00 a gallon - outpacing a jump in crude oil costs over $40 a barrel.
Energy analysts at Merrill Lynch said in a report that the spread between the cost of oil and the prices received for gasoline have more than doubled refining profit margins to a record $19.50 a barrel.
WOW!
Oil companies, which in 2003 posted their highest profits in decades, appear on pace for an even better 2004.
"Wow" was the single-word preface of an internal Shell Oil memo detailing its surprisingly large spring refinery profits, according a report by the Seattle Times in April.
The surging profits and high numbers at the pumps have led Democratic attorneys general in eight states to ask the Bush administration to join them in investigating whether big oil companies are illegally pushing up prices.
The request from the states comes amid growing pressure from Democrats in Congress and presidential challenger John Kerry for the White House to take action to ease record-high retail gasoline prices.
Exxon Mobil, the world's largest listed oil company, said worldwide refining and marketing earnings surged 39 percent to $1 billion in the first quarter, its highest result for that period in 13 years. Domestic downstream profit more than doubled to $392 million.
ConocoPhillips, the biggest refiner in the United States, said domestic refining and marketing earnings more than doubled to $403 million from $150 million. ChevronTexaco, the No. 2 U.S. oil company, said domestic downstream income rose nearly fourfold to $276 million.
Meanwhile oil refiner Valero Energy said earnings rose 46 percent to a record $248.1 million. Tesoro Petroleum earnings rose 150 percent to $50.4 million in the first quarter, the company said.
"You have tight supplies and you're throwing in very strong demand for products and more sporadic imports because international refiners have to upgrade," said Rousseau.
AFTER THE BOOM, THE BUST LOOMS
The silver lining should not obscure the cloud that lingers over the refining business, some analysts said.
"They're making tons of money. But they are not generating free cash flow: it all goes back into capex," said Rousseau.
Valero, for example, is expected to generate $2 billion of cash this year but return about $1.4 billion of it for capital projects, he noted.
Bob Slaughter, president of lobbying group the National Petrochemical and Refiners Association, said high profits can be entirely offset by capital spending.
Over the next decade, the NPRA estimates refiners will spend $20 billion to respond to a "blizzard" of regulatory requirements. That's on top of $20 billion spent during the past decade.
Over the past 10 years, the average return on investment for refiners was 5 percent, compared an average 6 percent across other industries. Last year returns rose to 6.4 percent - still below the me