Chris Faulkner, CEO for Breitling Oil and Gas Quoted in Mississippi Refinery Article

South Mississippi’s refinery sitting pretty, for now

By KAREN NELSON

Original Article: http://www.sunherald.com/2012/05/15/3950072/south-mississippis-refinery-sitting.html

PASCAGOULA — A global shift in who uses gasoline and diesel is causing upheavals in the business of refining crude.

The demand for automobile fuel has dropped in the United States and Europe.

Even with a glut of oil in the Midwest, refineries on the East Coast are closing or changing hands. And experts believe more will follow.

In South Mississippi, the Chevron Pascagoula Refinery is a major part of the area’s industrial heart. Its value to Jackson County is reflected not only in last year’s tax bill of $44.6 million, but also in the 1,500 employees.

But what are its prospects for the future?

The sprawling refinery on Industrial Road southeast of Pascagoula is 50 years old, but has undergone four major expansions in the last 10 years. It has 20 core refining units.

The capacity to refine 330,000 barrels of crude a day and store 600 million gallons makes it Chevron’s largest refinery in the United States.

One key to its value to Chevron is the fact that the company is investing $1.4 billion in a base-oil plant that will make the Pascagoula refinery a player in the growing global market of lubricants.

“I can’t speculate what the future will bring,” said Sean Comey, with the company’s Policy, Government and Public Affairs Department at the corporate headquarters in California. “But that (investment) should tell you we continue to think that this part of Mississippi is a good place to do business.”

Complex refinery

Pascagoula’s is rated a complex refinery, which adds to its value. The more complex the better. Part of its complexity is its ability to turn heavy and sour crudes into high-performance fuels.

The company lists it as one of six refineries worldwide that produce 75 percent of the Chevron’s fuel products.

And it may be well-positioned at a time when refineries on the East Coast are stumbling. It is the Gulf Coast refinery that’s the farthest east.

The others are in Texas and Louisiana. So Chevron’s Pascagoula Refinery may be poised to take up the slack on the East Coast, said oil analyst Nathan Schaffer with Groppe, Long & Littell of Houston.

But those in the business say refineries are hard pressed to make money in the United States. With the price of crude high and the cost of refining it equally high, even good ones are seeing slim margins.

The profit Chevron reported from its U.S. refineries in the first quarter of this year didn’t begin to touch the money coming in from drilling and oil production.

Chevron posted first quarter profits of $6.5 billion, but its U.S. refineries produced only $459 million of that, up 3.8 percent from a year ago, according to the San Jose Mercury News in California.

The good news is Chevron likes to own the whole process, from exploration to market and that means having refineries as part of its business, said Alan Sudduth the Pascagoula refinery’s manager of policy, government and public affairs.

“Chevron does believe in the importance of the value chain,” Sudduth said. “We feel encouraged from a business standpoint that Chevron will remain in the refinery business” and offer the community a measure of security.

“I think we’re in a good position,” he said. “Just about any crude you can pull out of the ground, we can process here and turn into a quality petroleum product. That adds to stability.”

The fact that Chevron is continuing to invest in the refineries it owns helps. It set aside $3.6 billion for capital improvements this year, but not all of that is in the United States, according to financial news wires.

Pipeline issues

It is, however, part of a complicated market.

For example, there’s a huge flow of heavy crude out of Canada that is pooling in Oklahoma because there’s no pipeline to bring it to the Gulf Coast, where an army of sophisticated refineries are thirsty for heavy oil, the type that the Pascagoula refinery specializes in, said oil analyst Chris Faulkner, CEO for Breitling Oil and Gas in Irving, Texas.

A pipeline in the works for the coming years would connect that huge supply with demand and change the dynamic, which is causing the North American crude to be sold at a discount of $14 or more a barrel.

The situation is giving Midwest refineries a shot at equally cheap light crude coming out of North Dakota, boosting their profits over the Gulf Coast refineries that rely on imported crude.

The Chevron Pascagoula Refinery relies on the higher-priced imports from Central and South America. With such massive North American production, Faulkner said, one would think America would be on the road to energy independence, oil prices would be coming down and gasoline would be getting cheaper. But it’s not.

Rising tensions in the Middle East and the lack of pipelines are a problem and some refineries being forced to pay premium prices for oil are shutting down, which limits gasoline supplies in parts of the country, he said. Speculation is also a factor.

And on top of that, Faulkner said, he expects more refineries to go offline because of the weakening demand for fuel in the United States and Europe.

“High unemployment and higher vehicle fuel efficiency have tamped down on fuel sales on both sides of the Atlantic,” he said.

As gas prices rise and western demand shrinks, refineries are closing across the developed world.

Couldn’t take the loss

Jackson County couldn’t take the loss, said Board of Supervisors President John McKay, who spent 20 years as an employee of Chevron’s Pascagoula Refinery.

“That refinery is extremely important not only to Jackson County, but to all of South Mississippi,” McKay said. “If this refinery closed, it would be devastating to Jackson County without a doubt.”

He said the county has come to rely on it for the long haul as something it can depend on for employment and tax base.

It is the top single taxpayer in the industrial county. Last year it paid $44.6 million, up $10 million over the previous year because of the base-oil expansion. The money is divided almost equally between the county and Pascagoula schools.

The next largest taxpayer is Mississippi Power at $12.5 million last year. Ingalls Shipbuilding, the state’s largest private employer, was third with $10.9 million.

“Right now they’re in a building process, upgrading it,” he said. And the company has from time to time told the county about plans it has on the drawing board, if the economy turns around, he said.

“I don’t think you’ll see this refinery closed,” he said. “Not in my lifetime, anyway.”