Refiners in the Midwest and in the Mid-Atlantic states have each experienced good times and bad, both before the Shale Era and more recently. Lately, though, fortune has been smiling on the owners of midwestern refineries, a number of which have been expanded and reconfigured to run cheaper heavy crude from western Canada — changes that have put them at a competitive advantage to East Coast refineries running more expensive light crudes. Now, a proposed refined products pipeline reversal in Pennsylvania would allow more motor fuels to flow east from Petroleum Administration for Defense District (PADD) 2 into markets traditionally dominated by PADD 1 refineries. Today we look at recent developments in Midwest and Mid-Atlantic refining, and at the consequential battle for turf that’s just starting to flare.
Over the years we have blogged extensively about the ups and downs experienced by refiners in PADD 1 (the East Coast) and PADD 2 (the Midwest). In Back to Red, which focused on East Coast refineries, we recounted that they can supply only a small portion of PADD 1’s total demand, and that for years they relied almost exclusively on waterborne imported crude for feedstock and therefore had little or no competitive advantage over their European refined-product rivals. Then, when the Great Recession of 2008 whacked East Coast demand for motor fuels, PADD 1 refining margins suffered and a number of refineries there were shut down. Then there was shale, and at first it was a godsend — midstream companies and some PADD 1 refineries developed supply networks to move then relatively cheap Bakken crude by rail to the East Coast, giving them a feedstock-price edge over their international competitors. But by 2015-16, several factors (among them, the build-out of pipeline infrastructure to relieve Midwest congestion, the oil price crash and the end of the ban on most U.S. oil exports) combined to make most crude-by-rail deliveries uneconomic and put PADD 1 refineries back where they were pre-shale — or worse.
In contrast, many PADD 2 refineries are riding high. As we said in Born to Run Heavy, a number of large midwestern refineries — including the largest, the 414-Mb/d BP Whiting plant in northwestern Indiana — have undergone major upgrades over the past few years to increase their coking capacity so they can process the heavy crudes being produced in growing volumes in western Canada. Most of the new coking capacity that came online was added to several of the refineries in PADD 2’s Eastern District, which includes Indiana, Illinois, Kentucky, Tennessee, Michigan and Ohio. Midwest refineries of all stripes — those that run light crudes and those that run heavy — fared well in 2012-14 as they benefited from Bakken and western Canadian crude whose price was discounted because of pipeline congestion between the Cushing, OK, crude oil hub and the Gulf Coast. As that advantage dissipated over the past couple of years, refineries in the region that have the ability to run heavy crudes are still able to achieve higher margins than their light-crude refinery counterparts.