Rocky Mountain High – PADD IV Refinery Economics Part 2 – New Additions

Refineries in the Rocky Mountains region, defined by the Energy Information Administration (EIA) EIA as Petroleum Administration for Defense District (PADD) IV, are smaller and less complex than they are in the rest of the U.S. The region is landlocked and the 16 refineries – average size only 42 Mb/d - rely on U.S. light sweet crude produced locally or in North Dakota as well as Western Canadian heavy crude. The combination of rich supplies of crude and increased demand for refined products such as diesel means that refinery margins are high. These healthy economics are encouraging refinery expansions. Today we examine these plans.

Recap

In Episode 1 of this two part series, we described the somewhat unique refinery set up in the Rockies – aka PADD IV – which encompasses the States of Montana, Utah, Colorado, Wyoming and Idaho. To these 5 States we added North Dakota for our analysis – even though it is technically in PADD II – because it has an important influence on supply and demand in the Rockies.  The region’s 17 refineries (counting the two Suncor refineries in Denver, CO as one and including Tesoro’s Mandan, North Dakota plant) have total capacity of 742 Mb/d with the Suncor Denver complex being the largest at barely over 100 Mb/d. While many of them are full conversion refineries, they lack the same percentage of total upgrading capacity that most refineries in the rest of the U.S. possess.  In most other regions, small and less complex refineries have been shut out by economies of scale, but in PADD IV they are alive and well.  The refineries are supplied by crude from outside the region including heavy crude from Western Canada and local Rockies production. However, in-region production is growing and forecast to exceed local refining demand by 2016 – even without taking into account booming Bakken production from neighboring North Dakota and heavy crude from Western Canada. This regional crude surplus means that refiners get attractive price discounts compared to competitors farther south or on the coasts. Refiners also enjoy the benefit of selling refined products into a market that has seen demand growth compared to declines in the rest of the country. As a result of competitive crude prices and strong refined product demand, margins are as high as $35/Bbl and refiners are running their plants at close to full capacity.

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Continued Growth in Demand

Figure #1 below shows how PADD IV demand for refined products has grown over the past six years by an average of 0.5 % annually compared to other refining regions. And that growth is expected to continue.  While projections show that through 2020, U.S. demand as a whole will decline by 0.2% annually, demand in PADD IV is still expected to increase by 0.9 % annually.  Although that PADD IV forecast increase is small as an absolute number; up just 38 Mb/d by the end of the decade, it is still very positive compared to the rest of the domestic market.  Much of the growth is expected to come from continued increase in demand for diesel, particularly its use in drilling and transportation associated with oil and gas production.  These growth prospects leave room for regional refiners to plan capacity expansions to meet increased demand in local  as well as bordering markets in PADD II (e.g. North Dakota) and PADD V.

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