BMI View: The settlement reached by BP, the US DoJ and EPA for the US$3.8bn modernisation of the Whiting refinery will allow the plant to process cheap Canadian tar sands crudes and boost its high-margin fuels output. The stringent environmental conditions are, in our view, a blessing in disguise for the firm as they set high barriers to entry for BP's rivals.
Supermajor BP North America (BPNA) has finally obtained regulatory approval to use Canadian tar sands crude for feedstock at its 405,000 barrels-a-day (b/d) Whiting refinery, based in the US state of Indiana, after years of opposition with the authorities. In 2008, after being granted the necessary permit, BP started construction of the US$3.80bn Whiting Refinery Modernisation Project (WRMP) and the upgrade was about two-thirds complete as of April 2012. Although the expansion was scheduled to run Canadian tar sands crude by 2013, the new units could have been left idle had BP not obtained the regulatory approval for its plan.
Although the Indiana Department of Environment Management issued an air permit for the WRMP in 2008, the Natural Resources Defense Council sued in an attempt to block it. The US Environmental Protection Agency (EPA), who had initially approved the expansion, eventually filed Clean Air Act violation against BPNA, while alleging in tandem with the Department of Justice (DoJ) that the company had defied a 2001 consent decree that covered the whole of the US downstream segment.
As part of the consent decree reached with the DoJ and the EPA, BPNA has agreed to the following: pay a US$8mn fine to settle allegations of air quality permit violations since 2001, invest US$400mn to install state-of-the-art air pollution controls at the Whiting plant, commit to US$9.5mn on projects to reduce greenhouse emissions at the facility, and maintain a US$2mn fence line emission monitoring system and make the data collected publicly available.
These requirements are similar to those included in the EPA's settlement in April 2012 for six of Marathon Petroleum's refineries. The EPA claims that the BPNA said that the agreement was part of its national effort to reduce emissions from downstream flaring. BMI views the Whiting refinery settlement as a strong precedent for the rest of the industry, as it sets some of the lowest emission standards to date, enhances controls on wastewater containing benzene and provides an enhanced leak detection and repair programme.
Historic Refinery Gearing For The Future
The Whiting refinery is one of the world's oldest; it was constructed in 1889, prior to the commercial advent of automobile. It is also the US' sixth largest, processing crudes sourced in Canada, the Gulf of Mexico (GoM) and Western Texas; it also has a high degree of complexity, with a Nelson index of 10.43. The Whiting plant is also ideally located to take advantage of the large and cheap Canadian tar sands volumes that are pouring into the Midwest refining sector.
Thanks to cheap Canadian heavy crude grades, the Midwestern downstream segment is outperforming most other US regions. Thus, in May 2012, 3:2:1 margins in the Midwest stood at US$30 against US$24 for the Gulf Coast - which is enjoying the benefits of a supply glut in Cushing -, US$16 for the West Coast and US$12 for the ailing East Coast. Nonetheless, the Whiting refinery had been unable to build on this competitive advantage, due to its inability to live up to the environmental challenges set by tar sands.
These crudes are extremely pollutant and require specifically designed units to upgrade them before they can be processed. In addition, flaring is a growing concern, with new calculations showing that this method is 7.5-15 times more polluting than previously thought. The WRMP was supposed to address all these challenges and buttress Whiting's position as one of the most successful and enduring refineries in the nation. Besides permitting the processing of cheap feedstock, the upgrade was also supposed to boost the production of high-margin products, expanding gasoline, diesel and jet fuel output by 15% to 305,000b/d (equivalent to a 76% white product yield).
A Blessing In Disguise
The settlement reached by BPNA with the EPA and the DoJ will allow Whiting to meet its targets and start processing Canadian tar sands crudes by 2013, as initially scheduled. However, the cost of the agreement appears to be rather steep at first glance. Nonetheless, BMI views these expensive investments and stringent standards as a blessing in disguise for BP.
The US$3.80bn project is the largest private-sector investment in Indiana's history and should reduce air pollution by 4,000 tonnes per annum (tpa), thus reducing emissions from the flare system by 90%. This clearly sets very high barriers to entry for would-be investors who hope to take advantage of large and cheap heavy crude volumes in the Midwest. Therefore, we believe that deep-pocketed BPNA has actually benefited from this settlement much more than it has lost.
Copyright 2012 Business Monitor International Ltd. All Rights Reserved.
(Originally published in the June 1, 2012, edition of BMI Americas Oil and Gas Insights.)