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Beast of Burden - California Refiners Struggle in a State That Wishes They Would Go Away

California refiners are under siege. State regulators seem to view crude oil refining as a nasty habit that needs to be broken. There’s an important catch, though: car-happy California is not only the nation’s largest consumer of gasoline — and second to Texas in diesel use — it allows only special, superclean blends to be sold within its boundaries. And California’s 12 remaining refineries need to meet tougher emission standards, too, making it difficult for them to expand their business or even modernize their plants. Today we discuss the irony that sophisticated refineries producing the cleanest fuels in the U.S. are faced with a shrinking market and no real hope of expansion.

This blog is based on Morningstar Commodities & Energy’s recently published Outlook on California refineries. Please contact commodity-research@morningstar.com to request a copy of the full report.

Previously on California’s Refineries

We’ve only covered California refineries peripherally in the RBN blogosphere. That’s probably a reflection of how isolated the state’s refining industry is from the rest of the Lower 48. California refineries have largely missed out on surging domestic shale crude supply — for two main reasons. First, there is a lack of pipeline capacity to ship shale crude across the Rockies (despite some projects being floated — see Is The Price of Freedom Too High). Second, there has been a lot of environmental pushback within California to proposals for alternative transport such as crude-by-rail (see Slow Train Coming). Initial hopes that shale crude from the state’s Monterey Formation would prove a big bounty were dashed by technical challenges (see Do You Know The Way to Monterey). On the downstream side of the business, California’s refiners have had to contend with a heavy burden of regulatory constraints, including the tightening grip of the state’s Low Carbon Fuel Standard (LCFS) that we first covered soon after it came into force in 2013 (see Aargh Matey! Cap’n Trade Sets Sail in California). More on the LCFS in a moment.

Sophisticated Fleet

Thirty-five years ago, in 1982, California had 40 operating refineries with a total 2.6 MMb/d capacity, according to the California Energy Commission (CEC). Today the state has 12 refineries producing transport fuels (listed in Figure 1) with a combined capacity of 1.86 MMb/d that ran at an average 86% of throughput capacity in 2016, according to the Energy Information Administration (EIA). These refineries vary widely in size — from Kern Oil’s 26-Mb/d facility in Bakersfield to Chevron’s 269-Mb/d El Segundo refinery, which is located just off the beach, south of Marina Del Rey and LAX (Los Angeles International Airport). About 45% of the state’s total refining capacity is in the San Francisco Bay area, and the rest (just over 1 MMb/d) is located south of there, mostly in the Los Angeles/Long Beach region. Despite reducing processing capacity over the past 35 years, California’s refineries today form one of the most sophisticated fleets in the country, producing squeaky-clean fuels from a generally heavy and sour crude diet. Of the 12 refineries, 10 have coking units used to process heavy oil. Only Kern Oil’s small Bakersfield refinery and Chevron’s Richmond refinery do not have cokers (see I’d Like To Buy The World A Coke for more on cokers). 

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