High natural gas prices threaten U.S. refining outputgreenspun.com : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread
High natural gas prices threaten U.S. refining output Tuesday December 12, 12:28 PM EST By Richard Valdmanis
NEW YORK, Dec 11 (Reuters) - A spike in U.S. natural gas prices, which has already battered consumers across the nation, could have a more wide reaching effect by cutting into oil refinery production, analysts said Tuesday.
This threatens to reduce the amount of gasoline and heating oil produced, despite low spare supplies and sky high prices.
Refiners, who typically use natural gas as a boiler fuel to power their plants, are already beginning to switch to cheaper liquefied petroleum gas (LPG) products like propane and butane in order to keep operating costs down.
But those products, derivatives of natural gas, are expected to become more expensive as well, leaving companies with no cheap alternatives and dragging margins in refining centers such as the U.S. Gulf Coast, into the red.
"The high natural gas prices could reduce refinery runs by a significant amount," said a source at a large Gulf refining company, who asked not to be named.
"The natural response of merchant refiners confronted with shrinking margins and increasing natural gas costs is to cut runs," said industry analyst Phillip Verleger in a report.
Natural gas prices on the benchmark New York Mercantile Exchange (NYMEX), have doubled since the start of November to a peak above $9 per million British thermal units -- quadruple the price at the start of this year.
The high prices for natural gas, combined with cold weather in the Midwest, have led to a spike in propane demand among consumers and refiners seeking cheaper fuels, and to the allocations of two major propane-carrying pipelines.
Although lagging behind the gas hikes, propane and other LPG prices are already near all-time highs after jumping 70 percent in the last six months with analysts warning the trend can only boost them even more.
GASOLINE, HEATING OIL SUPPLIES THREATENED
The No.2 U.S. independent oil refiner Valero Energy Corp. (VLO) said that high natural gas prices have led it to use propane and butane at its California and Texas plants as a way to reduce operating costs.
Valero said it has not decreased runs. Many other companies declined comment.
A decrease in refinery production could mean another obstacle to healthy winter heating oil supplies in the Northeast and could spell yet another run up in gasoline pump prices this spring.
The use of butane as a boiler fuel can also reduce gasoline output at a refinery, since many producers use butane as a blendstock during the winter months. Valero said its gasoline output has not suffered.
Meanwhile, industry watchers are keeping a wary eye on refiners, especially in the Gulf Coast, where margins are already low and are under the greatest threat to rising operation costs.
Margins on the Gulf, which accounts for roughly half of U.S. production, were at break even in early December, but recovered slightly last week to $3.65 for every barrel distilled due to a slide in crude oil prices, according to Paul Ting, analyst for Salomon Smith Barney.
But "refining margins may weaken before staging a rebound" since last week's oil price drop is likely to have a short-lived effect, said Ting in his weekly report.
-- Martin Thompson (firstname.lastname@example.org), December 12, 2000