Lack of Funding, Capacity Expansions Dim Prospects for Upstarts to Build New U.S. Oil Refineries
Several start-up companies have recently proposed to build new U.S. oil refineries to address chronic domestic production capacity declines and a historic global energy shortage caused by complex Middle East conflicts with no quick end in sight.
While those projects appear to be the logical solution, most market watchers cast serious doubts over the viability of what would be the first newly constructed refinery in 50 years, citing the difficulty in raising enough capital to fund costly construction and competition from existing refineries expanding their production capacity.
Green Fuels Operating late last week broke ground on its $400 million refinery project in Duncan, Okla., at the former site of the Tosco refinery, which will have an initial capacity of 30,000 b/d that could be expanded to 50,000 b/d.
In March, another upstart, American First Refining, also proposed to build a 168,000 b/d refinery in Brownsville, Texas. In August 2022, Prairie Energy proposed to build a 250,000 b/d refinery in South Texas.
Within the past decade or so, there were several other proposals to construct refineries in North Dakota and Utah near local crude sources, or in Arizona to reduce the supply deficit amid growing demand. However, none of those plans have materialized.
“It’s easy to break ground and propose a new oil refinery but in reality it’s very difficult to raise the massive capital needed to complete the project,” said Andy Lipow, President of energy consultant Lipow Oil Associates.
John Auers, head of refined fuels analytics at RBN Energy, said greenfield projects which are ground-up new ventures tend to be much costlier on a per-barrel basis and less competitive compared to brownfields that involve upgrading existing refineries especially at large complex refineries. He also cited possible permitting issues in building a new oil refinery.
According to Auers, several prominent recent expansions include a project to add 75,000 b/d capacity to Citgo’s 484,000 b/d Lake Charles, La., refinery; a 25,000 b/d expansion to Valero Energy’s 424,000 b/d Port Arthur refinery in Texas; and a 2027 project to boost the capacity of Chevron’s 375,200 b/d Pascagoula, Miss., refinery by an additional 33,000 b/d.
“Whenever you have tight product markets, people are coming out of the woodwork to promote new refineries, but those proposals generally face significant challenges and have a relatively small chance of ultimate success,” he said.
Since refined products like crude oil are priced globally, greenfield projects also compete with incremental barrels by other recently added and massive refineries like Nigeria’s 650,000 b/d Dangote and Kuwait’s 615,000 b/d Al Zour refineries and other significant capacity expansions in Mexico, China and India.
According to Green Fuels Chief Executive Derek Williamson, the U.S. refining sector is currently stressed following a sharp decline in the number of facilities during the last several decades despite growing demand and aging infrastructure.
“We feel that it’s time to bring refining back to the areas where we produce crude oil,” Williamson said.
The Duncan refinery will source crude feedstocks from oil fields near Oklahoma via pipelines, rail and trucks and distribute products to Midcontinent markets, with operations expecting to start within three years, he said.
Williamson said the project has advanced through its planning stage, and he expects to source additional capital from investment groups and investors to complete construction and related infrastructure including an asphalt facility, storage terminal and rail extension.
American First Refining CEO John Calce said this week the company’s 20-year offtake agreement to supply gasoline, diesel and jet fuel for its proposed Brownsville, Texas, refinery helped create future revenue certainty.
Calce did not address the details of the offtake agreement, however. The company said in March it signed the supply and marketing deal with an unnamed “global supermajor.”
Prairie Energy Chief Executive Steven Ward said this week the South Texas refinery proposed in 2022 is no longer viable, citing regulatory and political factors. Still, Ward said he is exploring two other possible locations in Texas and Oklahoma.
In addition to the massive capital in the billions needed to build complex processing units and infrastructure, new refinery projects also require specialized technical and commercial expertise and the approval of municipal, state and federal regulators, among a long checklist to advance the projects.
Tom Kloza, a long-time energy analyst, said he does not believe current proposals to build a new U.S. refinery are viable.
“Money, money, money,” says Kloza, referring to his skepticism over those projects.
–Reporting by Frank Tang, ftang@opisnet.com; Editing by Michael Kelly, mkelly@opisnet.com
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