U.S. report: Fuel markets 'significantly impacted' by refinery shutdown

Posted: February 27, 2012

The U.S. Energy Department on Monday said fuel markets in the Northeast "could be significantly impacted" if Sunoco closes its Philadelphia refinery in June, leading to tight supplies and price spikes is some areas.

The report by the U.S. Energy Information Administration said that supplies of ultra-low sulfur diesel would be most affected by refinery shutdowns and transportation constraints.

"If the Sunoco Philadelphia refinery closes, price impacts are highly uncertain," said the report. "If areas cannot be adequately supplied in the short term, prices can spike."

The Energy Department report adds a new element to an increasingly sharp national debate over rising fuel costs - a hot-button political issue in the presidential campaign.

Markets have been able to accommodate the closure of the ConocoPhillips refinery in Trainer closed in September and Sunoco's Marcus Hook refinery shut down in December, the Energy Department said, partly offset by the startup of a Delaware City refinery in October after a two-year hiatus during a change of ownership.

But the potential loss of the Sunoco Philadelphia refinery "presents a complex supply challenge, and no single solution has been identified by industry participants that will address all of the logistical hurdles that must be overcome."

Pittsburgh and western New York state, which now are supplied through pipelines from the Philadelphia refineries, would most likely suffer dearly if supplies of diesel and heating oil were constrained.

Sunoco, which has its headquarters in Philadelphia, announced last year that it would shut down its 335,000-barrel per day refinery in the city if it is unable to find a buyer by June. The plant along the Schuylkill River represents 24 percent of the refining capacity in the Northeast.

"Today's report by the EIA is a deeply troubling reminder of the grave consequences that reduced refining capacity will have up and down the East Coast," U.S. Sen. Robert P. Casey Jr. (D., Pa.) said in a statement. "I will continue fighting to protect the workers and consumers who would be harmed by these closures."

What government can do is unclear. Sunoco said it has lost nearly $1 billion in three years on refining and is committed to exiting manufacturing and focusing its business on retail marketing and logistics.

If the Sunoco Philadelphia refinery shuts down in July, suppliers may need to find 240,000 barrels a day of gasoline and 180,000 barrels of ultra-low sulfur diesel by 2013.

The report said that imports of gasoline from Western Europe and Canada would likely make up for losses from local refineries.

But ultra-low sulfur diesel, which is increasingly in demand to meet environmental regulations, presents a greater challenge because little is produced overseas. Local marketers would need to transport the fuel from Gulf Coast refineries.

But pipeline capacity from the Gulf Coast is limited, as is the supply of U.S.-flagged vessels that would be needed to carry the fuel between U.S. ports.

U.S. Rep. Pat Meehan, (R., Pa.) said government might consider relaxing low-sulfur diesel requirements or relaxing Jones Act restrictions requiring U.S.-flagged vessels to carry cargo between American ports, "but I'm not prepared" to initiate such action.

The supply issue would be further complicated because New York state is requiring that heating oil - essentially the same thing as diesel - meet ultra-low sulfur levels in July.

The Energy Department said New York's heating oil requirement will effectively increase ultra-low diesel demand by 70,000 barrels a day. Maine, Massachusetts, New Jersey, and Vermont are scheduled to adopt ultra-low sulfur heating oil standards through 2018.

Refineries in the Northeast have supplied about 40 percent of the region's gasoline, 60 percent of ultra-low sulfur diesel and 45 percent of the heating oil. Imports and deliveries from the Gulf Coast make up the rest.

With U.S. demand for fuel in decline, U.S. refiners say that they are losing money because of an oversupply of refining capacity and rushing to shut down unprofitable facilities.

In addition to the three refineries near Philadelphia that are currently on the market, Sunoco shut down its Eagle Point refinery in 2010. Sunoco is currently converting the Gloucester County plant to a fuel terminal.

A huge refinery in the U.S. Virgin Islands, jointly owned by Hess Corp. and Petroleos de Venezuela, is also closing this month.

The efforts to shut down refineries has generated anger in communities affected by the job losses.

Marcus Hook officials are considering a zoning change that would prohibit Sunoco from using its property as a fuel terminal.

Thomas P. Golembeski, Sunoco's spokesman, said the measure "is really counterproductive and could result in additional job loss in Marcus Hook."

Contact Andrew Maykuth at 215-854-2947, @Maykuth on Twitter or amaykuth@phillynews.com.

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