After slashing multibillion-dollar construction projects, independent refiners are looking at ways to trim mere dollars and cents from their budgets.

Faced with declining fuel demand, independent refiners, who buy oil from other companies to produce gasoline, diesel, and other fuels, have already canceled or postponed some of the largest projects originally planned for 2009, and are now trying to reduce day-to-day operating costs. Refiners are installing fuel-efficient boilers and returning obsolete rental equipment in an effort to reduce costs and maximize their profits.

The cutbacks are a reaction to the apparent end of several years of profitable refining, in which refiners have operated their facilities at optimum rates. Refiners' are shifting their focus from increasing gasoline and diesel output to maximizing profitability. These efficiency efforts may result in lower volumes of gasoline and diesel production, as refiners hone in on waste at their plants.

Refiners have contended with volatile oil prices, which have soared above $145 and sunk below $50 a barrel Thursday, while demand for the gasoline and diesel they produce has declined. One common measure of refining returns, known as the "gasoline crack," has been negative for a month, without any relief. This indicator suggests refiners could have lost an average of about $4 for each barrel of crude they have converted to gasoline in the past month. Gasoline futures for December settled at $1.007 on Thursday, the lowest-priced gasoline contract since February 2004.

In 2009, refiners are likely to continue to face difficult conditions as new capacity begins to operate in India, China and the U.S., with the ability to refine an additional 2 million barrels a day of crude oil. These new plants and expansion projects are expected to be more efficient than existing refineries, putting pressure on refiners with older assets.

Deutsche Bank called attention to concerns over a weak global market for refined products in a report Wednesday, saying that political and corporate factors may prevent certain inefficient refineries from shutting down, exacerbating the supply glut.

Still, Deutsche Bank's refining analyst, Paul Sankey, suggested that there is some room for refiners to have fairly positive earnings early in the year if crude prices fall rapidly, allowing the companies to turn cheap crude into valuable light petroleum products.

"As the economy keeps declining, demand for gasoline remains relatively low," said Sander Cohan, an analyst with Energy Security Analysis Inc., a consultancy based in Wakefield, Mass. While demand for diesel fuel has been a bright spot this year, consumption has declined as the European economy has slowed and industrial demand has weakened.

As a result, the market for independent refiners' products is diminished. "It makes sense that they're going through the balance sheet with a fine tooth comb," Cohan said.

Perhaps the most dramatic efforts have been undertaken at Sunoco Inc. (SUN). Under a new chief executive, the second-largest U.S. independent refiner by capacity has retained consultants McKinsey & Co. and launched an internal review of its operations.

The largest U.S. refiner, Valero Energy Corp. (VLO), plans to spend $1 billion to improve operating efficiency at its refineries between 2007 and 2012, and Tesoro Corp. (TSO) also launched an efficiency initiative last year.

Pumping Savings

Equipment dealers who provide refiners with industrial supplies say they have noticed a change in their customers' approach.

At Godwin Pumps, a New Jersey-based company that rents and sells water pumps and related products to clients including all of the East Coast refineries, refiners' cutbacks became most evident in early November. Godwin serves plants ranging from Western Refining Inc.'s (WNR) small Yorktown, Va., refinery to Valero's large Delaware City, Del., refinery. The efforts to trim budgets came as refiners announced third-quarter earnings. While many were profitable, each expressed concern about the future.

"Refiners started cutting back, pretty drastically, all of the sudden," said Charles Heintz, Godwin Pumps' manager for sales and rentals in the North East. The company has helped Sunoco evaluate how to reduce its costs for pump rentals. Sunoco will now buy at least six pumps that it has rented for a few years, Heintz said, reducing its monthly rental costs. Pumps are an essential component of refineries, helping to move liquids through the complex piping systems that connect process units to one another.

Industrial companies are looking at their costs with a critical eye, carefully reviewing whether each rental component is needed, he said. While some of those rental pumps are being purchased, others are being returned. Because some of these pumps serve an ongoing use in refineries, it's more economical for companies to buy them outright, rather than to pay recurring rental fees.

While Sunoco spokesman Thomas Golembeski declined to comment on specific equipment decisions, he said the cutbacks showed a shift away from producing maximum volumes of fuel, and toward operating as efficiently as possible.

"Now that the market has changed, and the outlook is different, we've shifted our focus and we're looking at our costs," said Golembeski.

Long-Term Efforts

Dealers who sell energy-saving equipment have also seen a change in clients' preferences. San Antonio, Texas-based Valero has purchased new high-efficiency boilers to cut its fuel consumption and reduce its operating costs. Boilers, which are used throughout refineries, are an essential component, producing steam that is needed for units to operate.

Valero announced in 2007 that it planned to invest $1 billion in operating efficiencies. The effort to reduce its spending was stepped up this summer, when CEO Bill Klesse rolled out a program to standardize procedures across Valero's 15 plants, which were acquired from various competitors as the company grew.

"We realized we've got to take this collection of refineries and integrate them into a management system of uniform expectations, measures and standards as well as continuous improvements," said Rich Marcogliese, Valero's chief operating officer.

Marcogliese said the effort was intended to be a long-term initiative that would withstand the ebbs and flows of refining profits.

Copyright (c) 2008 Dow Jones & Company, Inc.