Analysis: US refiners still wary of California

OREANDA-NEWS. May 14, 2015. A rare strong quarter for US west coast refiners did not change the industry's dour view of the most difficult and volatile US market.

Unplanned shutdowns this year helped sustain the longest stretch of northern and southern California refining margins above \\$30/bl since 2007, according to Argus assessments. Margins through the first five months of the year have averaged higher by more than 50pc compared to the same period of 2014 in the northern California market and higher by 40pc over the same period in southern California.

But refining executives in earnings conference calls dismissed the notion that the quarter was enough to rekindle interest in a region with the stiffest industry regulations in the US that is also pursuing an aggressive reduction of petroleum fuel demand.

"We like the west coast this quarter," Phillips 66 chief executive Greg Garland said. "But, fundamentally, our long-term view of the west coast hasn't changed. We think it's a really challenged place to do business."

California already requires a boutique gasoline blend with sulfur and other impurity requirements more rigorous than most US fuel. Production of Carbob requires a level of refining complexity that has helped to limit supply of the fuel into the west coast.

State legislators will hold hearings next week on a bill that would codify governor Jerry Brown's proposal to reduce greenhouse gases by 40pc from 1990 levels by 2030 and slash petroleum use by 50pc. The region hosts some of the first railed crude offloading terminals connected to the Bakken shale region, but projects proposed more recently are mired in years-long regulatory reviews.

California crude production has meanwhile slid into inexorable decline. State gasoline consumption trended lower over the past five years, according to the Energy Information Administration.

The west coast also provides limited opportunity for export. Refiners can supply western Mexico and Latin America, but arbitrage further into the Pacific rarely works.

The environment has largely squelched refiner interest in refinery spending beyond keeping up with regulations and maintenance. Refiners operating in California praise the facilities they have and express little interest in upgrading them.

"In the event that we spend much money, we have better opportunities in our US Gulf coast and midcontinent," Valero executive vice president Lane Riggs said.

The state still has its bulls. US independent refiner Tesoro has concentrated its business in the state over the past four years, acquiring BP's business to become the state's largest refiner by capacity and command a major wholesale and retail fuel business.

And PBF Energy, which dove into the struggling US Atlantic coast market before railed Bakken barrels provided a profitable boost to that region, still pines for a California refinery.

Strong margins may not have revised refiner's long term plans in the state, but it had slowed their haste to leave, PBF chairman Tom O'Malley said.

"We've had a strong appetite" to buy, O'Malley said. "I think what has changed is the appetite of people on the west coast to sell something right away. Sadly, we don't have a west coast refinery right now."