(Bloomberg) — When Exxon Mobil Corp.’s latest addition to full production at its southeast Texas refinery takes place in the next few weeks, it will be the first major expansion of U.S. fuel-making capacity in at least a decade. And maybe the last one.
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For Exxon, the timing has worked impeccably: It is expanding supplies of diesel and a gasoline component called vacuum gasoil, or VGO, just as customers are struggling to replace accepted Russian cargoes.
In addition, expanding the refinery to the small industrial town of Beaumont, about a 90-minute drive from Houston, gives Exxon a guaranteed outlet for oil produced in the Permian Basin in West Texas and New Mexico. Domestic crude net Exxon access is more than $40 for each barrel of diesel produced, historically eye-popping margins.
Exxon’s achievement is unlikely to be repeated, given the industry-wide push to reduce carbon footprint and concurrent refinery construction in Africa, the Middle East and Asia that would increase global oil-processing capacity. In the US, gasoline consumption has already peaked, reducing any incentive for refiners to spend billions expanding production.
Even as U.S. rivals such as Marathon Petroleum Corp. and Valero Energy Corp. finalize expansions at their Texas refineries, they pale in comparison to Exxon’s massive 250,000-barrel-daily capacity increase that would shape the Beaumont complex. Will make it in another place. Saudi Aramco’s massive plant in nearby Port Arthur.
“We are very excited about this project,” said John Ayers, RBN Energy’s Managing Director of Refined Fuels Analytics, regarding Exxon’s expansion. “They’re likely to be the last big expansion in America. They’re the last guys.
When Exxon launched the $2 billion Beaumont expansion project five years ago, the global refining industry was on the brink of a dramatic downturn that would cut nearly 4 million barrels of daily fuel-manufacturing capacity from pandemic-induced energy demand and tougher environmental regulations. Will see as Most unprofitable to operate old, dirty plants.
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But for Exxon, the math of what a bigger Beaumont would mean for its bottom line was compelling. Chief Executive Officer Darren Woods said that despite what was happening in the wider world of refining, Exxon’s Permian crude was so cheap to produce and so cheap to haul to the plant that the investment was justified.
Woods told analysts during a January 31 conference call that Exxon “justified that project purely on logistics optimization and low-cost transportation to feed that refinery”. “We bowed when others bowed, bucking conventional wisdom.”
The refinery’s daily capacity will increase by about 70% to about 619,000 barrels, almost as big as the Saudis’ 626,000-barrel complex in neighboring Port Arthur.
In contrast, Exxon’s smaller rivals are engaged in less ambitious projects. Marathon Petroleum is nearing completion of an expansion of its Galveston Bay refinery that will add 40,000 barrels of daily crude oil capacity. Meanwhile, Valero is set to add 100,000 barrels of daily capacity to its Port Arthur complex.
Exxon’s advantage over both of those peers is that it has its own source of crude oil. Because they don’t own wells, pure-play refiners like Marathon Petroleum and Valero are exposed to oil-market volatility.
Exxon’s expansion also creates a new source of vacuum gas oil, or VGO, which is in high demand among US refiners cut off from Russian production, their biggest overseas source of the component before the war in Ukraine.
“When Exxon envisioned expansion, I’m sure it was about feedstock,” said Amrita Sen, co-founder and research director at London consultancy Energy Aspects. “Now it’s more about the lack of a refinery.”
To be sure, large refinery expansions are underway outside the US. According to Sen, a list of new Middle East projects are in various stages of coming online.
According to Energy Aspects, so-called refinery runs are set to increase this year by 1.7 million barrels compared to 2022, with much of that concentrated in the second half and devoted to a class of fuels called middle distillates that includes diesel. Is. In the US, the expansion trend could be offset somewhat by plans by LyondellBasell Industries NV to close a Houston complex as well as convert two California refineries to renewable-diesel production.
Exxon’s new firepower comes as domestic stocks of diesel and similar fuels are 10% below their 10-year average for this time of year. The deficit is even more acute along the East Coast, where the deficit is 16%.
The Beaumont plant in the state’s far southeastern tip, close to the Louisiana border, sits at the nexus of fuel production and demand: The Colonial Pipeline could haul the region’s fuel to East Coast markets, while nearby Gulf Coast ports could transport it to international destinations. Can load on bound tankers. ,
For his part, CEO Woods didn’t claim that the expansion was done to capture profits from an upward cycle that no one else saw coming.
“We can’t call that a cycle,” Woods said during a late January conference call. “We cannot predict where the market will go and in what time frame, but we can control the cost of the barrels that we are bringing in.”
–With assistance from Kevin Crowley.
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