Refineries Unlikely to Rescue Fuel Prices Sunday April 15, 1:37 PM EDT By Bernie Woodall NEW YORK (Reuters) - High prices for gasoline in summer and heating oil in winter will become annual events unless the strained U.S. refining system adds some capacity, but there is next to no chance of any new plants being built, industry experts say.

Not since Marathon Oil Co. (MRO)opened its Garyville, Louisiana plant in 1976 has there been a completely new -- grassroots -- oil refinery in the United States.

Tight government regulations on refinery locations, environmental opposition to new plants, and years of poor returns in the refining industry have left the U.S. oil business straining to provide enough of the high-tech fuels demanded by new green regulations.

Even with an oilman in the White House, there is next to no chance for a new U.S. refinery in the foreseeable future, said Bob Slaughter, general counsel for the National Petroleum Refiners Association (NPRA).

The NPRA is among a stable of oil industry groups hopeful that President Bush will make it easier to expand refineries, cut down on demanding new fuel specifications and offer tax incentives to companies to foster increased petroleum product production.

With new stringent specifications for gasoline and diesel fuel due to take effect in 2006, plans to expand refineries must start now, he said. A newly built refinery takes around five years to get up and running and expansions only a year less, Slaughter said.

"If we are going to come anywhere close to keeping pace with increased demand for petroleum products in the next decade we're going to have to add capacity to existing sites," Slaughter said.

The Bush administration is not ready to say how a national energy policy to be announced this spring will deal with the issue, said Juleanna Glover Weiss, spokeswoman for Vice President Dick Cheney.

"We will be looking at ways to increase the refining of crude," Glover Weiss said, offering no details.

DEMAND, FEWER REFINERIES

The U.S. uses around a quarter of all world oil, consuming about 19.5 million barrels of refined products -- mainly gasoline, diesel fuel, jet fuel and heating oil -- each day, according to the U.S. Energy Information Administration.

By 2010, U.S. consumers will demand 22.5 million barrels of refined products a day and 25.5 million barrels daily by 2020, making the country increasingly reliant on imported oil, the EIA projects.

The number of U.S. refineries has dwindled in recent years as expensive plant upgrades needed to meet new environmental rules shrunk refining returns, forcing smaller and older plants out of business.

The return on investment for oil refineries from 1981 to 1998 was about four to five percent, roughly the same as the interest on a passbook savings account. In the same span, S&P companies averaged returns around 12 percent.

Big oil firms such as BP Amoco Plc (BP) and Exxon Mobil Corp. (XOM) have had to sell refineries and concentrate on the more profitable exploration and production part of their business.

In the mid-1980s, around 200 U.S. oil refineries had a total production capacity of 14.3 million barrels per day. By last year, upgrades at existing refineries nudged total production up to 16.3 million barrels each day, but the number of plants decreased to 155.

"We've used up the excess capacity. There is no excess capacity anymore," said Edward H. Murphy downstream general manager for the industry group American Petroleum Institute (API).

"The Department of Energy is saying petroleum product demand is going up by a third in the next 20 years. We're going to have to increase refining capacity by that much," Murphy said.

Tight supplies now mean that refiners' profits are booming again, but there are major obstacles before this will translate into building new plants.

Federal rules make it construction permits for almost any construction for new or existing oil refinery hard to come by, while the Clean Air Act puts a host of other hurdles in the way, says the NPRA's Slaughter.

"The most important thing for the industry is to get a more reasonable and streamlined permitting process," Slaughter said.

Public reluctance to live near heavy industrial plants like oil refineries also thwarts the building of new plants. The public comment phase of any refinery construction is perhaps the most feared aspect of the process for an oil firm, and can last 18 months or more, says Slaughter.

If the public and government allowed a grassroots refinery running 200,000 barrels daily, the cost of it would be $2.5 billion to $3 billion, said Joseph Loftus of Turner, Mason & Co., consulting engineers in Dallas.

Oil companies last year made record profits and refining profit margins are now near an all-time high. But refiners aren't rushing to build plants because they fear the recent trend won't hold in a cyclical industry, said Carlton Adams, spokesman for U.S. oil firm Conoco Inc. (COCa). ©2000 Reuters Limited.

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