Sunoco's Philadelphia Refinery

**raider.adam** · 02-28-2012, 10:27 AM

I'm not intimately familiar with the logistics of this. Anyone who is in the know, can you elaborate? I am curious how a refinery that is reported to handle 24% of the NE capacity, that if shut down would possibly have severe impacts in supply, loses so much money as well as can't find an appropriate buyer?

What are the issues at hand?

U.S. report: Fuel markets 'significantly impacted' by refinery shutdowns

**Politburo** · 02-28-2012, 10:50 AM

It's 24% of NE refining capacity, but not 24% of NE supply. We are also supplied via pipeline, but as I understand that is mostly at capacity with a small expansion taking place.

A refinery can't really increase the price of their end products unless a bunch of other producers agree to do so. They also can't do much about the price of their raw materials. But you probably have a better handle on the economics than I do.

If the refinery operations lose money, I think it only makes sense that you'd have trouble finding a buyer.

Here's the actual report: http://media.philly.com/documents/Re...g_Activity.pdf

**raider.adam** · 02-28-2012, 10:57 AM

I guess what I was getting at is, to put it simply, if it has such a strong need that shutting it down would likely have a significant impact on prices and supply, what are the problems it is facing?

I will check out the PDF you linked. It may have the answers in there. Thanks.

**Politburo** · 02-28-2012, 11:26 AM

My guess would be that it needs upgrading (whether due to regulation, age, incoming crude characteristics, or some combination, I don't know). I don't think it's answered in the report.

**phillyaggie** · 02-28-2012, 11:28 AM

The problem has been discussed here in the past. It boils down to the Philly area refineries (owned by various corporates: Sunoco, Valero, ConocoPhillips, and others in the past and changed names and hands multiple times) major new investment in a long time so the are not as complex as the ones on the Gulf Coast and elsewhere. They can only process a slate of sweeter crudes, which have become far more expensive on the international market. Add to that, Sunoco long ago gave up exploration and isn't a vertically integrated company-- exploring for crude (which is the most profitable part of the biz) and then plowing money into downstream ops.

In short: buyers at our area refiners have to shop for more expensive, sweet crude feedstocks on world markets which are benchmarked at Brent Sea Crude prices. The difference in that benchmark price and the local West Texas Intermediate keeps widening, but the end product prices are equal whether you process one type of crude or the other. So the refinery gets squeezed in their gross and operating margins. Add to that the fact that other refineries can not only switch crude slates but also produce a different ratio of products because they are more complex, thus driving out better efficiencies. So if jet fuel has better margins one day, a refinery on the Gulf Coast can produce more of that product by turning down its FCC unit and turning up some other units.

Basically, Sunoco can't make a dime on its rusted junk, it hasn't kept up with the times, and now it seems nobody wants to buy it because it would take some significant new investment before the refinery can start to be profitable.

**Jayfar** · 02-28-2012, 11:30 AM

Sunoco HES Report - Sunoco’s Major Raw Material – Crude Oil

Sunoco’s refineries process sweet, super light crude oil, thus avoiding the installation of additional processing units that would be needed to convert the heavier, sour crudes into high-value finished products. Although there currently is a large price differential between sweet and sour crudes, over time that difference has not been enough to justify the large capital expenditures needed to enable Sunoco to run heavy sour crudes.

Sunoco refines about 900,000 barrels per day (BPD) of sweet crude. The majority of Sunoco’s crude oil -- more than two thirds -- comes from West Africa, including countries such as Nigeria, Angola and Gabon. Other supply sources include Canada, the North Sea, North Africa, Venezuela and the U.S.

**raider.adam** · 02-28-2012, 11:39 AM

Originally Posted by phillyaggie

The problem has been discussed here in the past. It boils down to the Philly area refineries (owned by various corporates: Sunoco, Valero, ConocoPhillips, and others in the past and changed names and hands multiple times) major new investment in a long time so the are not as complex as the ones on the Gulf Coast and elsewhere. They can only process a slate of sweeter crudes, which have become far more expensive on the international market. Add to that, Sunoco long ago gave up exploration and isn't a vertically integrated company-- exploring for crude (which is the most profitable part of the biz) and then plowing money into downstream ops.

In short: buyers at our area refiners have to shop for more expensive, sweet crude feedstocks on world markets which are benchmarked at Brent Sea Crude prices. The difference in that benchmark price and the local West Texas Intermediate keeps widening, but the end product prices are equal whether you process one type of crude or the other. So the refinery gets squeezed in their gross and operating margins. Add to that the fact that other refineries can not only switch crude slates but also produce a different ratio of products because they are more complex, thus driving out better efficiencies. So if jet fuel has better margins one day, a refinery on the Gulf Coast can produce more of that product by turning down its FCC unit and turning up some other units.

Basically, Sunoco can't make a dime on its rusted junk, it hasn't kept up with the times, and now it seems nobody wants to buy it because it would take some significant new investment before the refinery can start to be profitable.

That would seem to make sense. Thanks.

So the issue seems to boil down to either needing to upgrade the refinery to handle other crude processing or be purchased by someone who has access to large amounts of sweet crude for processing?

**luchobucho** · 02-28-2012, 12:16 PM

See my additions:

Effectively, without an economical feedstock, the plant is functionally obsolete.

Originally Posted by raider.adam

That would seem to make sense. Thanks.

So the issue seems to boil down to either needing to upgrade the refinery to handle other crude processing or be purchased by someone who has access to large amounts of relatively inexpensive (compared to heavier sour crudes) sweet crude for processing?

**AbortedWalrus** · 02-28-2012, 12:20 PM

Originally Posted by raider.adam

That would seem to make sense. Thanks.

So the issue seems to boil down to either needing to upgrade the refinery to handle other crude processing or be purchased by someone who has access to large amounts of sweet crude for processing?

The problem is that there isn't anyone with a large amount of sweet crude for processing. It's getting more and more rare and expensive, which is why the refineries that used to process it are closing.

FYI, Sweet Crude is crude with a low sulfur content. It may be the case that Philadelphia's clean air laws may make it prohibitively expensive to refine non sweet crude because the sulfur in the sour crude. Sour crude has a lot of hydrogen sulfide in it, which is very toxic, hence the environmental legislation on it. Combine the rising cost of light sweet crude and the environmental policies and you have probably seen the end of the lifetime of the refinery.

**Politburo** · 02-28-2012, 12:57 PM

I'd have to double check but I believe the federal standards go beyond the Philadelphia requirements.

ETA: I have confirmed this.

**phillyaggie** · 02-28-2012, 12:59 PM

Philly metro (along with most other major metro areas around the country) is in non-attainment of the federal ozone standard, so yes, it requires cleaner fuels especially in summer ozone season (the summer blend).

**billy ross** · 02-28-2012, 03:12 PM

Originally Posted by luchobucho

See my additions:

Effectively, without an economical feedstock, the plant is functionally obsolete.

Either the economics of the feedstock or the configuration of the plant need to change, or the plant will go away. What about the other two 'endangered' plants? Are they in the same boat? I sort of get the impression that the market won't support closing all three. How expensive is it to transport refined gasoline? I would think it's incredibly dangerous, much moreso than crude. Gasoline seems like the kind of product that you want to produce close to where it's used, like electricity and non-frozen seafood.

**Politburo** · 02-28-2012, 04:58 PM

If changing the feedstock or configuration increases emissions, it could qualify as a change in operation that would subject the units to the latest standards. Pretty sure Eagle Point is not yet subject to that one, dunno about the others.

**billy ross** · 03-01-2012, 08:16 AM

Originally Posted by phillyaggie

The problem has been discussed here in the past. It boils down to the Philly area refineries (owned by various corporates: Sunoco, Valero, ConocoPhillips, and others in the past and changed names and hands multiple times) major new investment in a long time so the are not as complex as the ones on the Gulf Coast and elsewhere. They can only process a slate of sweeter crudes, which have become far more expensive on the international market. Add to that, Sunoco long ago gave up exploration and isn't a vertically integrated company-- exploring for crude (which is the most profitable part of the biz) and then plowing money into downstream ops.

In short: buyers at our area refiners have to shop for more expensive, sweet crude feedstocks on world markets which are benchmarked at Brent Sea Crude prices. The difference in that benchmark price and the local West Texas Intermediate keeps widening, but the end product prices are equal whether you process one type of crude or the other. So the refinery gets squeezed in their gross and operating margins. Add to that the fact that other refineries can not only switch crude slates but also produce a different ratio of products because they are more complex, thus driving out better efficiencies. So if jet fuel has better margins one day, a refinery on the Gulf Coast can produce more of that product by turning down its FCC unit and turning up some other units.

Basically, Sunoco can't make a dime on its rusted junk, it hasn't kept up with the times, and now it seems nobody wants to buy it because it would take some significant new investment before the refinery can start to be profitable.

Methinks thou dost protest too much. I just checked. Yesterday West Texas Intermediate traded at $107 per barrel, while Brent Crude (which is light and sweet) traded at $122. That roughly 10% price differential shouldn't be enough to move the needle on the competitiveness of the Sun plant, especially considering all of the extra processing that the heavier, more sour crude produced domestically needs and also transportation costs of getting the refined product to market (which is around these parts).

**Politburo** · 03-01-2012, 08:23 AM

A $15 spread is something like $4-5 million per day.. you can't see how that would be enough to move the needle? And it's not the only factor.

**billy ross** · 03-01-2012, 08:36 AM

Originally Posted by Politburo

A $15 spread is something like $4-5 million per day.. you can't see how that would be enough to move the needle? And it's not the only factor.

If you're doing $4-5 million a day less processing plus you save in transportation costs plus you save money tied up in inventory plus you're able to respond immediately to changes in a highly volatile market, I can easily see how it can move the needle. Fundamentally, very many companies pay a 10% percent premium for premium inputs and thrive because that's how their business model works. It's only a 10% premium in the cost of 1 input, not 10% higher overall costs, and what is it worth to be located AT your market when you're selling a very dangerous product which isn't easy to transport?

What do you think it costs to do business in New York City and Boston? A 10% premium? Of course not. It's dramatically more than that. Yet they thrive...

**raider.adam** · 03-01-2012, 08:58 AM

Originally Posted by billy ross

If you're doing $4-5 million a day less processing plus you save in transportation costs plus you save money tied up in inventory plus you're able to respond immediately to changes in a highly volatile market, I can easily see how it can move the needle. Fundamentally, very many companies pay a 10% percent premium for premium inputs and thrive because that's how their business model works. It's only a 10% premium in the cost of 1 input, not 10% higher overall costs, and what is it worth to be located AT your market when you're selling a very dangerous product which isn't easy to transport?

What do you think it costs to do business in New York City and Boston? A 10% premium? Of course not. It's dramatically more than that. Yet they thrive...

Except Sunoco is reporting they lose $1 billion a year at the processing plant.

**billy ross** · 03-01-2012, 09:09 AM

Originally Posted by raider.adam

Except Sunoco is reporting they lose $1 billion a year at the processing plant.

And Sunoco is supposed to be a paragon of high-quality management? It's clearly a tired company which is winding down, and which has made enormous strategic blunders due to the myopic vision of its 'leadership'. See American Motors, Heileman or Stroh's, Pan am or Eastern, and Sears / Kmart and compare them to Hyundai, Yuengling, Southwest, and Target. Leadership, strategy, and process controls are huge.

**raider.adam** · 03-01-2012, 09:16 AM

Originally Posted by billy ross

And Sunoco is supposed to be a paragon of high-quality management? It's clearly a tired company which is winding down, and which has made enormous strategic blunders due to the myopic vision of its 'leadership'. See American Motors, Heileman or Stroh's, Pan am or Eastern, and Sears / Kmart and compare them to Hyundai, Yuengling, Southwest, and Target. Leadership, strategy, and process controls are huge.

So what is your explanation why no one wants to buy the refinery when you are saying it should be profitable with just better management?

**billy ross** · 03-01-2012, 01:58 PM

Originally Posted by raider.adam

So what is your explanation why no one wants to buy the refinery when you are saying it should be profitable with just better management?

I'm not sure, but I believe that there are three refineries that are on the chopping block. Brent crude shot up incredibly high during the Libyan crisis, since their light, sweet production left the market. That messed up the economics of the older refineries which are configured for the better quality crude and not the tar-like stuff that we (and the Saudis) are pumping now that we've exhausted the fields with the higher-quality crude. However, just because 2011 was a bad year for older refineries doesn't mean that they should all close - LIbyan production is back on the market, and the spread has dropped, I believe. There will be a shakeout, but I'm guessing that not all of the 'uneconomic' Philly-area refineries will close permanently. Some may or even will, and it may be Sun's Philly refinery. However, I'm guessing that Marcus Hook or Philly will ge snapped up and some smart person will make alot of money. Maybe both, maybe only one. The economy is recovering, and with it the demand for gasoline. The Delaware River will retain most of its refineries until we switch away from gasoline as a transportation fuel.

I'll try to pay more attention, but other refineries have been 'closed' and sold, then reopened by other operators after some investments were made, and I don't think they were huge investments. I'm thinking Paulsboro and Delaware City. What makes you think it'll be any different now?