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Crude Oil Quality a Growing Issue for U.S. Refiners

The quality of the world's crude oil that will be produced in the near future is falling and some U.S. refiners may soon have to invest millions in their plants to refine the changing flow of crude, experts said on Thursday.

Production of sweet crude (search), which is low in sulfur and easier to refine, is increasing slightly from a few places, especially Nigeria. But that gain will be more than offset by declining production of light, sweet crude from the North Sea, said Sarah Emerson, director of Energy Security Analysis Inc. (search) in Boston.

The United States' appetite for crude oil is increasingly fed by Mideast nations, which produce light and heavy sours, Russia, which produces a range of sour crudes (search), and Canada, where new production from heavy oil sands is also mostly sour.

The boost in the amount of sulfur in what goes into refineries comes at the same time that governments are cutting sulfur levels in what comes out of them.

The United States, countries in Europe and increasingly Asian nations are increasingly capping the amount of sulfur in transportation fuels because it can ruin catalytic converters in cars, and forms gases in the air that cause smog and acid rain.

"There are a lot of things happening all over the world all at once," said Emerson. The result is that recent heavy discounts for domestic sour crudes such as Mars and Poseidon that make them $4 to $5 per barrel cheaper than the light, sweet oil benchmark on oil futures traded in New York is almost certain to remain. "The spreads are likely to stay fairly wide, this is an organic thing," Emerson said.

This is the second recent wave of increased sour crude for U.S. refiners after sour exports rose from Venezuela and Mexico in the 1990s. The result, analysts said, is that refining is an increasingly polarized game between refiners that invested before or during the first wave in cokers and desulfurizers, the $500 million to $600 million units that break down sour crudes, and those such as Sunoco that are playing a purely sweet game.

"It's a completely different game plan and they are comfortable with it," said Fadel Gheit, analyst at Fahnestock & Co, about refiners that play sweets.

Large integrated major oil company refiners such as Exxon Mobil Corp. (XOM) are well placed because they are able to make investments more easily.

But even refiners that have already invested in cokers once may have to do so again.

"Under the heavy investment burden, refiners are choosing to lighten crude slates instead of building the $500 million desulfurizers. At the same time the global crude mix is becoming more sulfurous," said analysts at Deutsche Bank in a report that said discounts for heavy sour crudes should remain for the next three years.

While sophisticated retooled refiners such as Marathon and ConocoPhillips can make a profit in the near term from cheaper sours, the second wave of sour production and reduced sweet production from the United States and North Sea means even sophisticated refiners may have to retool some of their plants soon, analysts said.

"Eventually there will have to be more cokers, the industry is all a matter of economics, and refiners will have to ask themselves, 'If I do not do the coker, where will I stand?"' Gheit said.

Plans for expansions could happen quickly, especially as construction can take up to two years. Also refiners have profited from record high gasoline prices this spring, and as retooling at refineries for other clean fuel requirements slows down.

"We expect the cash to be put to use in expansions -- particularly in the Midwest, where (Canadian) oil sands discounts will encourage spending," said Deutsche Bank.

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