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U.S. refineries can't match demand for fuel New plants haven't been built in 30 years -- and no one wants them here, anyway By Dina Temple-Raston USA TODAY

MARCUS HOOK, Pa. -- The Greek supertanker Sifnos is docked at berth No. 3 beside the Marcus Hook oil refinery on the shores of the Delaware River. Its crew, in orange fire-retardant jumpsuits, strolls around its vast decks as giant hoses siphon 500,000 barrels of West African crude into the bowels of the 800-acre refinery.

The plant, a tangle of shiny and rusted metal pipes, domed processors and cinder block buildings, stretches as far as the eye can see. The operation runs around the clock, processing 175,000 barrels of crude every day. As refineries go, it is running flat-out, company officials say.

On Friday, however, the plant's furious activity will slow to a crawl. Every fall, Marcus Hook and scores of plants like it across the nation begin regular scheduled maintenance, a process that significantly reduces production.

In any other year, that might not be a concern. But this year, the repairs come at a time when heating oil, diesel and jet fuel supplies are already thin nationwide, and refineries can't keep up with demand. While critics of the Organization of Petroleum Exporting Countries (OPEC) have been quick to blame the oil cartel for the latest spate of rising prices, the inability of refineries to keep pace with demand has made a difficult situation worse.

That's why the administration wants refiners to keep production humming. It was part of the motivation behind releasing 30 million barrels of oil from the Strategic Petroleum Reserve (SPR). It is unclear whether refiners will be able to put off repairs to absorb the new flow of oil.

''Our maintenance has been in the works for about a year,'' says Donald Zoladkiewicz, loss control manager at Marcus Hook. Zoladkiewicz says Sunoco has already made arrangements to hire 1,000 construction workers for the job, which, among other things, will include replacing the entire dome on a regeneration plant.

If everything goes according to plan, the plant's production will fall by almost half, to 90,000 barrels a day, for about a month as the company powers down one of its fluid catalytic cracking units (used to turn crude into gasoline) and shutters another major crude unit for maintenance. Sunoco says it will still be able to fulfill all obligations to its customers.

The idea is to take advantage of the lull between the summer driving season and the winter heating season. Marcus Hook's near-50% production drop is an extreme example, but most plants lose significant amounts of output, sometimes as much as 10%.

Right now, the nation's refineries are running at about 96% capacity. That's about to fall. In 1995, refineries dropped to 90.5% capacity in October, according to Energy Department figures. Similarly, in 1998, that figure fell to 89.6%. Last year, it was 91.9%.

Emergency release

Part of the motivation for releasing 30 million barrels of oil from the Strategic Petroleum Reserve was to encourage refineries to keep running at top capacity, say aides close to President Clinton's decision. With heating oil inventories down 20% from this time last year, they were concerned that a decline in production would make that situation worse.

The aides are betting the extra oil will lower the cost of crude and that lower crude prices will provide enough of an incentive to refiners to put off less-than-crucial maintenance and keep production high, or even raise it, until after the energy crunch is over.

''The goal is not only to expand the existing capacity but to ensure that refineries continue to run at such a strong rate over the next couple of months,'' says Gene Sperling, Clinton's top economic adviser. ''Lower oil prices could give refiners at least temporarily higher operating margins, and that should encourage them to keep capacity up.''

Sunoco, for its part, is too far along to reverse the year's worth of planning that led to the latest repairs on Marcus Hook. ''We start coming down this weekend,'' says Zoladkiewicz. ''Even if we wanted to, we're too close to back out now.''

This week, oil companies, refiners and traders will begin bidding on the SPR's 30 million barrels. Under the program, they will be allowed to trade a barrel of government oil now for a pledge to replace that barrel, plus an extra amount negotiated with the government, next year. Aides expect the new flow of oil will drive down prices to about $30 a barrel from recent highs of $36-$37.

Next week, the Energy Department will select the best bids and announce the winners. If all goes according to plan, the oil will reach refineries over the next several weeks and could be refined and on the market as heating oil by early December.

While that might take care of the short-term problem of heating oil shortages, it does nothing to address the underlying issue of how to bring energy supply into line with energy demand over the long run. That, analysts say, is a trickier problem.

No new refineries

''This is a refinery crisis, not an OPEC crisis,'' says Dennis O'Brien, director of energy economics and policy at the University of Oklahoma.

Traders worry that there could be shortages of refined products -- from heating oil to gasoline -- this winter because refineries can't process crude oil fast enough to meet demand.

''We could get 40 million barrels from OPEC tomorrow, and that wouldn't solve the problem we have in this country,'' says Bill O'Grady, oil analyst at A.G. Edwards. ''We have topped out on our refinery capacity, but demand is still climbing. People are stepping into gas-guzzling SUVs and don't give energy use a second thought. What they don't understand is that refineries can't keep up.''

The numbers tell the story: U.S. refineries produce nearly 15.7 million barrels a day of gasoline, heating oil, diesel and jet fuel. Consumers are gobbling it up at the rate of about 18.6 million barrels a day. Usually, imports of refined products make up the difference, but recent market disruptions in Europe forced oil companies to dip into inventories to make up the shortfall, whittling stockpiles even further.

At the same time, while the appetite for energy has been growing, there hasn't been a new refinery built in the USA in a generation. Sunoco's Marcus Hook plant, for example, was built in 1902 and has gone through successive upgrades since then. The last refinery Sunoco built was in Puerto Rico in 1971. That plant is one of America's youngest. There are about 180 refineries in North America and about 200 in Europe.

''Exploration is the romantic part of the oil business and refining is the grunt work,'' O'Grady says. ''It's dirty and it's dangerous, and people don't want something like that in their backyard. Who could blame them? That's one of the reasons why we have a refinery shortage in this country.''

Help from overseas

Just last month, an accident at Sunoco's Marcus Hook plant sent shock waves through the nearby town of Linwood, Pa. Jackie Pilkington, a hairdresser and mother of two, was home with her children when she heard a ''hissing boom'' and saw green smoke rising from the refinery's catalytic cracker. She tried to calm her nerves.

''I always worry about my kids, but I figured if we needed to be evacuated, people from the plant would come and tell us,'' she says. Sure enough, an hour later, a Sunoco representative was at her front door to tell her part of the plant had an electrical short and powered down. Spent catalyst -- a thin, non-toxic dust created in the refining process -- was shooting into the air above Pilkington's home, says Sunoco's Zoladkiewicz. He was part of the team that fanned out into the neighborhoods to report on the accident.

''Donny (Zoladkiewicz) told me just to stay inside until the smoke cleared,'' Pilkington says, adding that Sunoco workers arrived two days later to power wash her house and yard. ''I can see how if you aren't used to it, that could scare people. Sometimes there is a smell, but I don't smell it much anymore.''

For more than 40 years, Rose Archbald has looked out her back windows to see nothing but refinery. ''Sunoco has been a very good neighbor,'' she says, adding that any time there is an accident or a fire they tell neighbors right away. ''These refineries kind of get a bad rap. They have come a long way in the past 20 years.''

Even so, the bad rap for the industry generally has stuck, so much so that experts expect the USA will end up going overseas for refined products before it builds new refineries here.

Fifteen refiners -- from Royal Dutch/Shell to Chevron -- control about 40% of the world's refining capacity, and most new refineries are sprouting in Asia. In 1999, India led the world in new refinery projects. It added three plants to eventually bring its capacity above 1.1 million barrels a day.

That, analysts say, could be the key to satisfying a burgeoning energy demand in this country.

''There is oodles of excess capacity in the Far East, and they are running 50% to 60% of capacity,'' says O'Grady, who sees this as a possible escape hatch for the USA. Right now, though, it's not economically attractive for faraway refiners to ship large quantities of refined products to the United States, he says. That could change if crude oil prices drop and refined product prices stay where they are.

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''It wouldn't take a whole lot for that to happen,'' he says, adding that if crude oil fell below $25 a barrel -- roughly the administration's target price -- while heating oil prices stayed put, the economics would work out. ''I think that's the way we'll see things go,'' O'Grady says. Cover story Cover story

-- Martin Thompson (mthom1927@aol.com), September 27, 2000