Exxon Mobil, rivals to invest $11 billion in new refineries

Joe Carroll

Monday, March 21, 2005 | 11:11 a.m.

Exxon Mobil Corp., the world's biggest oil refiner, and rivals such as Saudi Aramco and Total SA plan at least $11 billion of refinery additions as worldwide demand pushes gasoline prices to a record.

The projects include a $4.3 billion refinery and chemical plant on Saudi Arabia's Red Sea coast by Saudi Aramco and Sumitomo Chemical Co. Exxon Mobil, Aramco and China Petroleum & Chemical Corp., China's largest refiner, are spending $3.5 billion to triple the size of an oil refinery and build a chemical plant in Fujian province

The expansion, following two decades of reduced spending because of low prices that cut profits, reflects surging demand that is raising the cost of gasoline, diesel, jet fuel and heating oil.

Refining "was for so long a poor business," said Mark Baxter, director of the Maguire Energy Institute at Southern Methodist University in Dallas who was an engineer at Marathon Oil Corp. for 28 years. "There's a dire need for expansion," he said in an interview last week.

Fuel prices have increased more than the cost of crude oil from which they are derived, making oil company refinery profits grow faster from producing and selling oil and gas, even as crude prices touched a record $57.60 last week in New York.

The average U.S. retail gasoline price reached an all-time high of $2.061 a gallon on March 18, up 16 cents in a month, according to AAA.

Prices at the pump will average $2.15 a gallon from April through September, when warm weather and summer vacations usually push U.S. demand to a peak, the Energy Department said in a March 8 forecast.

"Prices for gasoline at the pump are being dragged up by demand and a lack of refining capacity in the U.S. and worldwide to meet that demand," Baxter said.

High fuel prices contributed to $9.18 billion in losses last year for the 10 biggest U.S. airlines and prompted Fort Worth, Texas-based Burlington Northern Santa Fe Corp. and other railroads to impose surcharges on freight deliveries to cover higher diesel costs. Concern that higher energy costs may boost inflation have helped stall stock market gains, with the Standard & Poor's 500 Index of U.S. stocks falling 1.9 percent in the past two weeks.

The $11 billion of new refinery projects, announced by oil companies during the past 10 months, will be spread out over the next six years. They are in addition to continuing spending on repairs and expansions, which was $11.9 billion last year among the seven largest publicly traded oil companies.

No publicly traded company has announced plans to build a new refinery in the U.S., which has 20 percent of global refining capacity, according to data from the Paris-based International Energy Agency. The U.S. is followed by Russia with 6.6 percent, Japan with 5.8 percent, China with 5.5 percent, and then South Korea, Italy, Germany and India.

Global demand for gasoline, diesel and other fuels derived from oil is expected to jump 69 percent by 2025 to 142 million barrels a day, according to the U.S. Energy Department in Washington. Refining capacity will probably increase just 56 percent during that time to 131 million barrels a day.

"The oil industry has not committed to expanding refining capacity" in recent years," Ann Kohler, an energy-industry analyst at Independent Research Group in New York said in a March 16 interview. "The world is now running at full capacity."

Worldwide demand for petroleum-based fuels has surged 20 percent in the past decade, outpacing the 12 percent rise in refining capacity, according to data compiled by the International Energy Agency.

The disparity between fuel demand and fuel-making capacity "is expected to persist, continuing to create dislocations between crude and products markets, as well as contributing to higher oil prices," the Organization of Petroleum Exporting Countries said in a statement.

Profit from processing oil into fuels rose faster than income from producing and selling crude and natural gas last year for Irving, Texas-based Exxon and its six biggest competitors. The other six are Royal Dutch/Shell Group of London and The Hague, Europe's second-largest oil company; London-based BP Plc, the world's second-largest publicly traded oil company; San Ramon, Calif.-based ChevronTexaco Corp., the second-largest U.S. oil company; Paris-based Total, Europe's largest refiner; Eni SpA of Rome, Europe's fourth-biggest oil producer; and ConocoPhillips of Houston, the largest U.S. refiner.