Photograph by Mike Mergen, Bloomberg/Getty Images
Published April 4, 2012
Its tanks and endless mazes of pipes, its smokestacks and its smells have long dominated the urban plain where the Schuylkill River spills into the Delaware. At 1,400 acres (566 hectares), it covers more land area than the original settlement of Philadelphia. And it has pumped fuel and money into that city-and far beyond-for so long that its owners reckon it is the oldest continuously operating oil refinery in the United States.
But Sunoco's storied South Philadelphia refinery may be cooking its final barrels.
Sunoco is getting out of the refining business. If a buyer is not found for the sprawling facility, it will be shut down on July 1, just like the company's other old refinery 12 miles to the south, Marcus Hook, which was idled in December. Several weeks later, ConocoPhillips closed its adjacent refinery on the Delaware River. Together, the three refineries employed 1,200 workers represented by the United Steelworkers of America and nearly as many salaried and contract workers. They manufactured 50 percent of the petroleum fuels produced on the East Coast of the United States.
The closures and potential closure mark a profound change taking place in the oil business, where tremendous divides have opened up between the prices of different grades of crude oil extracted from different locations on the globe. The new economics have translated into huge profits for some, and punishing losses for others, depending on their place in the pitiless energy production chain.
(Related: "Crude Reality: Gas Prices Rocket Because They Can")
It is well understood that the pain will not end with the 2,000 or so Philadelphia-area workers who are now bearing the brunt of this economic dislocation. In a region encompassing one-fifth of the U.S. population and both the nation's capital and its most populous city, with gasoline prices already near $4 per gallon ($1.06 per liter), the supply of fuel is being choked just before summer driving season, when demand ratchets upward. "The industry may not be able to overcome all of the logistical challenges in the Northeast for a year or more," says the U.S. government's energy forecasting agency, the Energy Information Administration (EIA).
In other words, the East Coast market may well respond to the new home-grown squeeze the same way it has dealt with Middle East uncertainty and burgeoning Asian demand. The high price of gasoline, heating oil, and diesel fuel will rise still higher.
A Once-Ideal Location
Sunoco claimed stake to the South Philadelphia site with the purchase of the old Atlantic Richfield refinery in 1988 and Chevron's adjacent facility in 1994. Sunoco melded them together to create a 335,000-barrel-per-day behemoth, now the largest refinery on the U.S. East Coast.
The site, with its easy water access near population centers, had been used for processing crude oil into fuel since the 1860s, soon after the world's first commercial petroleum well was drilled in Titusville, Pennsylvania. One of the advantages for Sunoco was its pipeline link to the company's long-standing Marcus Hook refinery, just 12 miles south on the Delaware River. Soon after Sun Company was incorporated in 1901 by oil entrepreneur Joseph Pew, it purchased Marcus Hook as an ideal site to receive and process crude shipped by tanker from its then-burgeoning oil fields in Spindletop, Texas.
But more than a century later, the heyday of Texas gushers long past, the tankers docking at U.S. East Coast refineries hail mainly from West Africa or the North Sea. These coastal refineries purchase light, sweet crude oil at the global benchmark price known as Brent, the same price paid for the commodity in Europe and Asia. Through most of the 1980s and 1990s, that price was slightly lower than the U.S. benchmark price, known as West Texas Intermediate, or WTI.
In the next decade, however, global oil prices rose high enough to make oil production from the Canadian oil sands profitable, even though it was both labor- and energy-intensive. Production ramped up quickly, and the oil sands are fast becoming the largest single source of U.S. crude imports, says EIA. In June 2010, TransCanada began operation of its Keystone pipeline to bring oil sands crude into the U.S. Midwest, and in February 2011, an extension line opened up to carry that crude into the self-styled "pipeline crossroads of the world," Cushing, Oklahoma. But this crossroads is currently more like a bottleneck, because there isn't enough pipeline capacity to move the oil out of this huge trading and storage center to refineries.
(Related: "Is Canadian Oil Bound for China Via Pipeline to Texas?")
That's important because the buying and selling of oil at Cushing sets the price of WTI on the New York Mercantile Exchange. Thanks largely to Canadian oil, so much surplus supply is backlogged in Cushing that it held down the U.S. benchmark WTI over the past year, even while the global benchmark Brent shot upward because of Middle East strife and burgeoning Asian demand. (The portion of the much-debated Keystone XL pipeline project that was deferred by the Obama administration would not help with the Cushing backlog; the area of environmental concern is in the Nebraska Sandhills on the way from Canada to Oklahoma. The Obama administration is encouraging completion of the southern part of the proposed pipeline, from Cushing to the Texas refinery, to help unjam the bottleneck.)
The price spread between WTI and Brent has "reached unseen levels," says EIA. Last week, with WTI at more than $103 and Brent over $123 per barrel, the differential was near last summer's record of almost $21 a barrel. The price difference gives a huge advantage to refineries in the U.S. Midwest and the Gulf Coast that can buy WTI crude, over the refineries on East and West coasts that have to buy oil at the global Brent price. The advantage is especially great for refineries that are equipped to handle the further discounted heavier, "sour" crude, full of sulfur and impurities, like that from the Canadian oil sands.
(Related Photos: "Satellite Views of Canada's Oil Sands Over Time")
Sunoco could process only light, sweet crude at its Pennsylvania refineries, and its earnings statements told the story of how much its once-prized East Coast location had diminished in value. Paying premium prices for crude, Sunoco lost money in 10 of the past 12 quarters. Its Northeast refining business has been in the red since 2008, with cumulative pre-tax losses of more than $900 million.
"This is why we need to exit the refining business, as difficult as this is for our employees and communities," said Lynn L. Elsenhans, then-chairman and chief executive officer of Sunoco, as she released the company's quarterly results in February, a conference call in which she also announced she was stepping down. "It is our view that the outlook for motor fuel demand and refining margins in the Northeast remains weak and may continue to get worse."
Indeed, the squeeze for Sunoco and other U.S. coastal refiners is due not only to the high price they are paying for crude, but also to the anemic demand for the gasoline they are churning out. The increase in the volume of ethanol mixed into the gasoline supply, improvements in vehicle efficiency, and policies to encourage adoption of electric vehicles all have contributed to depressed demand for gasoline. Researchers also believe that the United States and other developed nations have reached "peak travel," meaning the number of miles driven per year is not increasing as it did in the past, for reasons they believe are independent of the slowdown in the economy.
"Cyclical economic factors aside, U.S. refiners now face the potential of long-term decreased demand for their products," said the U.S. Congressional Research Service in a November 2010 analysis.
Lowered demand should cause prices to fall, but the United States is just one (admittedly large) portion of the global oil market. Demand for oil continues to rise unabated in Asia and that is reflected at the price at the gas pump, especially on the East and West coasts of the United States. The price just isn't high enough to make the coastal refining business profitable.
Bracing for Impact
It is uncertain how much more gas prices on the East Coast will be lifted by the loss of refining capacity. Already, the U.S. average gasoline price was $3.97 last week, up more than 60 cents, or 18 percent since the start of the year. "It's a bit of an anomaly to have such a dramatic and sharp increase," says Nancy White, spokeswoman for the American Automobile Association. Typically, she said, prices increase 7 to 10 cents in the late spring as refineries switch over to producing gasoline blends that produce less pollution in the summer months, as required by law. White pointed out that U.S. gas prices still had not reached the all-time peak of $4.11, hit in July 2008. As for the impact of the refinery closings, she said it was premature to say. "At this point there's a lot of uncertainty," she says.
The EIA said that so far, the transition has been smooth, mainly because the loss of fuel from the Marcus Hook and ConocoPhillips refineries was partially offset by the October 2011 startup of a former Valero refinery in Delaware City, Delaware, that had been shut down for two years. The facility was bought by PBF Energy, a company run by the private equity firm, Blackstone, which is attempting to execute a turnaround.
Sunoco also shopped its Marcus Hook refinery to private equity groups, as well as big publicly traded oil companies, oil companies run by oil-producing nations, pipeline companies, and other refiners, contacting more than 150 potential purchasers over five months with the help of its financial adviser, Credit Suisse. There were no takers.
Sunoco's new CEO Brian MacDonald, who had been chief financial officer before taking over the helm on March 1, told The Philadelphia Inquirer that the company is looking at alternative uses for the site, probably tied into Pennsylvania's booming Marcellus shale natural gas production. The site's deepwater dock, connections to rail and pipeline networks, and extensive fuel storage capacity could allow it to be converted into a terminal or petrochemical plant.
And Sunoco is continuing to shop for buyers for the Philadelphia refinery. EIA says if it closes in July as announced, "the Northeast could be significantly impacted as the additional loss of volumes and reduced access to distribution systems may create temporary, localized shortfalls and associated price surges." The agency says there's plenty of refining capacity outside of the East Coast, but constraints on pipelines and other avenues to get the fuel to the Northeast. Sunoco, in fact, which is now focused on pipeline and terminals as well as retailing, has expanded its storage facilities in New Jersey, and could reverse its pipelines to bring fuel from New York Harbor to the Philadelphia area to help address shortages, the company said.
But oil storage terminals employ only a handful of workers compared to refineries, says Jim Savage, president of the United Steelworkers Local 10-1, of Sunoco's Philadelphia facility. Savage, who has been with the company 20 years, traces his entire life history to Sunoco refineries; his grandfather emigrated from England to work at Marcus Hook. His uncle and cousins also worked for Sunoco. "My family only existed in this area of the country because of these refineries," he said. "And that's not a unique story."
Now, some former Marcus Hook workers are packing up their families to move to Texas for refinery jobs, he said. Others face the daunting job market in the U.S. Northeast, where the ripple effect of the refinery closures could be significant. A Pennsylvania Department of Labor & Industry report estimated the indirect impact could escalate job losses to more than 36,000, with overall losses of more than $560 million.
The local impact, though, will depend on the churning of a global oil market. For now, Savage and his workers wait to see if it will upend the life they knew.
"Every time some idiot in the Middle East hiccups you get these speculators who drive up the price," he said. "The cost of crude doesn't reflect how much it costs to get it out of the ground and into tankers. That's a problem people should talk about more. People are sitting behind desks somewhere, selling and buying pieces of paper, and it has a real impact."
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