PADD 2 Refinery Configuration Comparison to U.S. Industry | RefinerLink

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PADD 2 Refinery Configuration Comparison to U.S. Industry

By Market Analyst Dan

Jul 22, 2012

A high level summary of PADD2 refinery configuration and production yield as compared to the rest of U.S. Refining. 


With One-Fifth of the U.S. population residing in the Midwest, this region has refining capacity that matches fairly well with regional oil demand. 


This region boasts large metro cities such as Chicago, Columbus, Detroit, Milwaukee, and Missouri.


In the Overview of U.S. PADDs, I summarized


that 20% of U.S. refining capacity resides in the Midwest.  That in itself doesn’t carry much intrigue factor.  What should interest you; however, is how the configuration of refineries in PADD 2 differ from others in the U.S. oil industry. 


Refinery configuration matters since feedstock flexibility and product yield capability contribute significantly to refinery profitability.



Gasoline Yields


Let’s start first by comparing the yield of gasoline from Midwest refineries to that of other PADDs. 


Possessing 20% of the overall U.S. refining capacity, PADD 2 contributed 29% of total U.S. gasoline production in 2011.


By contrast, the U.S. Gulf Coast


(PADD 3) has 50% U.S. refining capacity, but only accounted for 45% of the gasoline production in that same year.



Gasoline vs Distillate Yields


To spin this at a different angle, let’s rewind time by 4 years and compare product yield between the two regions.  In 2007 when gasoline prices were at a premium, the U.S. Gulf Coast favored gasoline production vs distillate production to maximize refinery profitability.  


PADD 3 Gasoline production as a percentage of overall U.S. production was over 10% higher in 2007 than in 2011.  Over the same years of comparison, PADD 2 contribution was 6 % lower.





The refiners in the Midwest are no dummies.  Surely they would like to maximize distillate production when distillate prices are at a premium, and vice versa when gasoline prices take charge.  What limits PADD 2 refiners from taking advantage of market economics is their refinery configuration. 



Conversion Unit Comparison


 By comparing capacities of cracking units, you can see that PADD 2 refineries do


not have any advantages relative to PADD 3 in producing gasoline through catalytic, thermal, or hydro cracking technology. 


The factor that drives the difference in PADD 2 gasoline yields is naphtha Reforming capacity relative to overall crude throughput. 


While octane balance had some motivating factor, the primary driver for large reformers in the Midwest is the demand for Hydrogen. 






Location Disadvantage – H2 Supply


Unlike the Gulf Coast and the West Coast, refineries in the Midwest are not concentrated in dense areas.  Without economy of scale to build large hydrogen production facilities onsite or nearby, many PADD 2 refineries leverage naphtha reformers to supply hydrogen for refinery consumption. 


Lack of alternate hydrogen supply in today’s market environment create large disadvantages for PADD 2 refineries.   This limits the amount of naphtha that can be converted to jet fuel when distillate prices fetch a premium. 


Additionally, PADD 2 refiners cannot take advantage of depressed natural gas prices.  Other regions enjoy the large margin of converting natural gas to hydrogen, and then converting the hydrogen to refined liquid product.


Given the lack of manufactured hydrogen availability, PADD 2 refineries have configuration requirements that constrain gasoline yields to a higher amount than other PADDs.



Holy Asphalt


When industry analysts think about the Midwest, we all think that PADD 2 refineries consume a significant amount of heavy crude. 


That’s not necessarily true as PADD 2 refineries had the highest average crude API amongst all the PADDs for 2011 crude oil consumption.


What may surprise many is the fact that PADD 2 refiners have relatively little coking capacity as well.  Despite the recent flurry of heavy upgrades projects in the Midwest, PADD 2 coking capacity relative to net crude throughput lags all other regions.



The explanation…is all related to Asphalt production.  Asphalt has 2 primary uses – to pave roads and to make roofing shingles.


Roughly 85% of the asphalt consumption in the U.S. is comprised of road paving demand, and 40% of total asphalt demand originates in the Midwest. 



Roughly 85% of the asphalt consumption in the U.S. is comprised of road paving demand, and 40% of total asphalt demand originates in the Midwest. 




Not only does the Midwest have a vast footprint of road infrastructure, is has high population and severe weather.


In addition to normal wear and tear on asphalt roads from vehicle traffic, midwest roads suffer accelerated detioration.


Salts used on roadways to

maintain driver safety during the winter have a very detrimental effect on durability.  This results in higher rates of re-paving. 


As the old saying goes, “there are only two seasons in the Midwest... winter and construction”. 



Location Advantage - Crude Supply


Need I say more about this? Crude margins in PADD 2 are significantly higher than that of most other regions.  In contrast to the location disadvantages noted previously, the lack of logistic accessibility in this region creates significant margin advantages that outweigh the disadvantages.


Since majority of the crude production and receipt (from Canada) in the Midwest have limited shipping outlets, PADD 2 refiners historically received significant discounts on crude purchases.   Midwest crude refining margins have reached $30 - $50 /bbl, as compared to margins of $2 - $10 /bbl on the Gulf Coast.  That is just absurd!



Given the dynamic relationship of oil consumers and producers throughout the United States, it’s powerful to understand the macro fundamentals.  Whether market volatility is introduced by international or domestic forces, knowledgeable appreciation of refinery configuration differences between regions prove helpful.

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