The planned closure of Sunoco’s Philadelphia refinery, which accounts for a quarter of the US East Coast’s capacity, looks set to constrain supplies of diesel, heating oil, and perhaps gasoline, while pushing prices higher.
The projected shutdown, due to take effect in July if no buyer is found, was highlighted by the Energy Information Administration in a February 27 report saying petroleum product markets in the Northeast could be “significantly impacted” if the closure goes ahead.
The agency said it will be hardest to find alternative supplies of ultra-low sulfur diesel outside of the US Gulf Coast. Replacement supplies of all products could be hindered by restrictions in the capacity of pipelines that serve Pennsylvania and western New York because those pipes originate in the Philadelphia refinery complex, the EIA said.
“The industry may not be able to overcome all of the logistical challenges in the Northeast for a year or more as infrastructure changes will be necessary to accommodate the changing product flows,” the EIA said.
Sunoco said in September it will exit the refining business because of the “unacceptable financial performance” of the Philadelphia refinery and another at nearby Marcus Hook which closed in December. A third local refinery operated by ConocoPhillips in Trainer, Pa., shut down last September. The three facilities represented half of the East Coast’s refining capacity.
While the market has adjusted to the closure of the Marcus Hook and Trainer refineries – partly because of the startup of a PBF Energy facility in Delaware City – a closure of the much larger Philadelphia plant could cause problems, the EIA said.
“There is no question that the closure of refineries along the East Coast will cause prices to rise,” said John Shages, president of Strategic Petroleum Consulting in Washington, DC.
A shutdown of the Philadelphia facility could add between 10 and 50 cents a gallon to ultra-low sulfur diesel and heating oil, said Lucian Pugliaresi, president of the Energy Policy Research Foundation.
A Difficult Sell
Pugliaresi rated Sunoco’s chances of finding a buyer at “no better than 50/50″ because of high acquisition costs, low demand and regulatory concerns including New York state’s standard for the sulfur content of heating oil, which is out of line with other Northeastern states.
If Northeast product supplies tighten, it may be necessary to waive the requirements of the Jones Act which requires U.S. ships to carry cargo between US ports, allowing tankers sailing under other flags to deliver product from the Gulf Coast or elsewhere, Pugliaresi said.
Closure could also cut gasoline supplies to the Northeast market when demand is at its summer driving season peak, and as high gasoline prices are becoming an issue in the presidential campaign, said Tom Kloza, chief oil analyst at the Oil Price Information Service in New Jersey.
“To close a refinery at the apex of the driving season could wreak havoc for a portion of the Northeast, especially Pennsylvania,” Kloza said. “It’s quite frankly something we have not been through before.”
The Philadelphia refinery, which produces 355,000 barrels a day, was hurt by its inability to refine different grades of crude – unlike some of its competitors on the US Gulf Coast – forcing it to buy costly light sweet crude from overseas suppliers, analysts said.
It’s unclear whether any buyer would invest in a more complex facility, but there are already some candidates, according to Kloza. “I believe there is good interest,” from non-traditional buyers such as private equity firms, he said.
The refinery closures have prompted a March 19 hearing on threats to homeland security and the safety of critical infrastructure by a US House subcommittee on counterterrorism and intelligence.