Valero’s brand new $1.6 B, 60 Mb/d hydrocracker is set to ramp up at the company’s Norco, LA refinery this month (July 2013). They added a similar unit to their Port Arthur refinery last year and plan to expand existing units at their other refineries. Hydrocrackers leverage cheap US natural gas to boost production of ultra low sulfur middle distillates. That makes sense because of high diesel refining margins and a boom in exports over the past two years. But not many refiners appear to share Valero’s enthusiasm for these investments. Today we consider the benefit that these upgrading units offer.
Hydrocrackers are not new technology. According to the latest Energy Information Administration (EIA) refinery survey in January 2013 (published a couple of weeks ago), there is just over 2 MMb/d of hydro cracking capacity in US refineries. We have previously done our best to describe how refineries work (see Complex Refining 101 Part 1 and Part 2) but we’ll dive under the hood again for a moment to bring you up to speed on hydro cracking. You will feel better for knowing this and it’s a great time to learn more about refining in America.
Hydrocrackers are just one of the complex upgrading units in modern refineries. They process heavy gas oils that are yielded from vacuum distillation units. The hydrocracker uses a mixture of hydrogen and chemical catalysts to process the gas oils into jet fuel, diesel, and gasoline. A steam methane reformer is generally used to convert natural gas to produce the necessary hydrogen. Although hydrocrackers can be designed to produce a wide range of product yields, the output of the type of hydrocracker being built by Valero and others yields much more diesel than gasoline. The use of hydrogen in the process increases the volume of the feedstock. That means you get out 20 - 30 percent more liquids out than you put in.
Why are Valero investing in new and expanded hydrocracking units? For starters diesel has attained “most favored refined product” status of late due to increases in exports and higher prices than gasoline (see also Gulf Coast Diesel Crack Habit) . The chart below shows US Gulf Coast ultra low sulfur diesel (ULSD - blue line) and gasoline prices (red line) over the past three years. Diesel prices were on average $8.50/Bbl higher than gasoline over the period. Last year diesel exports from the US averaged 1MMb/d up considerably from just 138 Mb/d in 2005. Most of those exports are to Latin America where growing regional demand is combined with a lack of local refining capacity. European refining capacity has also been shrinking – with over 1 MMb/d closed or expected to close since 2008. In the circumstances US refineries have a great opportunity to max out diesel production.
Source: CME data from Morningstar (Click to Enlarge)
But most US refineries actually produce less diesel than gasoline. A typical Gulf Coast complex refinery is configured to output about 60 percent gasoline blending components and 30 percent middle distillates like diesel and jet fuel. That mixture lies behind the commonly used “3-2-1 crack spread” approximation that describes the margin of a refinery producing two barrels of gasoline and one barrel of diesel for every three barrels of crude (see Bakken Crude Pricing Part 4 for more on crack spreads). US consumers traditionally used more gasoline than diesel in the past, so refineries were built to maximize gasoline output. That equation has now changed because gasoline demand in the US is falling as a result of increased ethanol blending and more efficient autos (see No Apparent Demand). However, even as gasoline demand is falling, the new slate of lighter crudes that are showing up at refinery gates as a result of shale production in North Dakota and Texas is increasing the quantity of gasoline that refiners output (see Turner Mason and the Goblet of Light and Heavy and Charge of the Light Brigade). So while the marketplace is screaming “diesel”, refineries are actually increasing gasoline production. Hydrocrackers represent one investment refiners can make to help redress that imbalance.
Another win for refineries with hydrocrackers is that these units produce ultra low sulfur refined products such as diesel and gasoline. That product output goes a long way towards helping meet ever-tightening sulfur specifications set by federal regulations. The ULSD specification (15 parts per million – ppm) is already set pretty tight and the gasoline sulfur specification is anticipated to reduce from the current 30 ppm to 10 ppm in 2017 (see Tears of a Refiner). A hydrocracker produces virtually sulfur free products that refiners can blend with higher spec batches to lower the sulfur to the required ppm level.
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