Refinery utilization has followed an overall downward trend since 2006, with the pattern being particularly evident in 2009. Indeed, the average utilization rate as reported by the U.S. Department of Energy has hovered in sub-85% territory for much of the year with no sign of an uptick. As the industry continues to grapple with weak demand, a lackluster economy, and an unsettled regulatory environment that could ultimately favor refiners based overseas, owners of domestic refineries are contemplating how to optimize their operations. A Dallas-based consulting firm is developing a tool to help refiners objectively rank a given plant's prospects for enduring this tough competitive climate.

"U.S. gasoline demand peaked in 2006 and may never reach those levels again," said Michael Hileman, vice president of Solomon Associates. "In this environment, it is essential for refiners to objectively assess the strengths and weaknesses of their plants in order to determine where to invest their capital dollars." Hileman is spearheading Solomon's North American Refinery Survivability Study, which is designed to simplify the process refinery owners are facing in determining which facilities will best adapt to market demands that are in a state of flux.

"The industry is entering another transition period" characterized by an uncertain future, said Hileman, a chemical engineer with more than three decades of refining experience worldwide. "Besides the fundamentals of crude, gasoline, and diesel fuel, the future of the refining industry cannot be separated from the larger economic collapse and recovery. Questions like 'how do the automakers respond and recover,' 'how do individual family buying patterns respond and recover,' and 'how does the government respond and recover' will all have a significant impact on the refining industry."

'Questions like 'how do the automakers respond and recover,' 'how do individual family buying patterns respond and recover,' and 'how does the government respond and recover' will all have a significant impact on the refining industry.'

Budgetary constraints and subsequent waves of consolidation are nothing new to the refining business, which historically has been less profitable than other oil and gas sectors such as exploration and production and equipment and services. In fact, the number of domestic refineries steadily declined during the 1980s and 1990s although total U.S. refining capacity increased. Hileman asserts that the latest transition period for the industry – characterized by various cost reductive measures – will occur amid a markedly different backdrop than its precursors.

"I see two major differences," said Hileman. "One is the larger world economic condition and how it impacts the refining sector. What happened to the world's economy in 2008 has never happened before."A decrease in demand – rather than an overbuilding of refining capacity, which was a target of cost-cutting measures in previous decades – is the second unique driver of the current transformation. "How long ago was it that the question being asked by the 'talking heads' on television was 'why have we not built enough domestic refining capacity,'" Hileman asked. "It is the decline in gasoline demand that is driving rationalization."

The supply and demand balances of the gasoline and diesel markets are changing, and the gasoline demand decline may usher in a greater focus on the production of diesel. "Will gasoline demand continue to fall, making diesel fuel the dominant fuel in the U.S. transportation sector?" Hileman continued. "Companies will be focusing more on a refinery's diesel-production capabilities than in the past when making capital allocation and shutdown decisions," he predicted. Whether the momentum does shift in diesel's favor largely hinges on two factors: changes in consumer behavior and federal renewable fuels mandates. "While driving patterns have nearly returned to pre-economic collapse levels, the question remains whether there has been a permanent shift in automobile buying patterns to more fuel-efficient vehicles," Hileman explained. "The second driving force has been increased intrusion of ethanol into the U.S. gasoline pool – with talks of increasing the ethanol blending limit from 10% to 15%."

By way of its new survival study, Solomon's goal is to help refiners maneuver a proverbial perfect storm of variables relating to the economy, governmental regulation, consumer behavior, demand, and other factors. In addition, it will be designed to help these companies gauge the progress of their peers in addressing similar circumstances. According to the consulting firm, the survival study will incorporate data from a separate, broad-based 2008 Solomon fuels study and a newly developed "Solomon Survivability Index." The latter is a metric based on a weighted average of criteria, including: a plant's light product margin rank, general operating efficiency metrics, degree of forward and backward integration, and ability to meet current and projected ethanol-blending and cap-and-trade requirements.

Solomon's goal is to help refiners maneuver a proverbial perfect storm of variables relating to the economy, governmental regulation, consumer behavior, demand, and other factors.

The Solomon study reportedly differs from other "survivor" studies because it answers a different question -- are a refinery's prospects for survival "weak," "marginal," or "strong"? Hileman explained that each company participating in the study will receive a report detailing their refinery's competitive position compared to its peers in two projected gasoline demand scenarios. Aside from gaining an independent assessment of the long-term competitive position of their refinery relative to market peers, study participants can use the results to launch a performance improvement program to either protect or advance their relative competitive position, Hileman added.

For additional information about participating in Solomon's fee-based survival study or its next fuels study (no charge), companies should visit the consulting firm's web site: http://solomononline.com.