US: No New Refineries in 29 Years


About 100 miles southwest of Phoenix, in a remote patch off
Interstate 8, Glenn McGinnis is seeking to do something that has not
been done for 29 years in the United States. He is trying to build an
oil refinery.

Part of his job is to persuade local officials and residents to
allow a 150,000-barrel-a-day refinery in their backyard - no small
task. Another is to find investors ready to risk $2.5 billion in a
volatile industry. So far, the effort has consumed six years and $30
million, with precious little to show for it.

Oil industry analysts and trade organizations like the American
Petroleum Institute say they know of no one else doing the same thing.

Even so, Mr. McGinnis - an industry veteran who joined Arizona Clean
Fuels last year as chief executive to give the project more heft
against long odds - cleared a significant hurdle recently when Arizona
awarded him a crucial emissions permit. Still ahead are countless
rounds of negotiations with local, state and federal agencies to secure
dozens more permits.

Meanwhile, the 1,400-acre site picked for the refinery, an old
citrus grove near the Mexican border, remains empty, a sign of why the
United States is now grappling with an acute shortage of plants that
can refine the more than 20 million of barrels of crude oil that the
country consumes every day.

The last refinery to be completed in the United States was in 1976,
and Mr. McGinnis knows all too well that community and political
opposition squashed earlier projects. His proposed refinery in Arizona
has already been forced away from its original site near Phoenix, in
2003, after the state considered expanding the city's clean-air limits.

But times may be changing, said Mr. McGinnis, an oil business
veteran of 33 years who has run refineries in the United States and

"The moon and the stars have aligned for us," he said, speaking on
his cellphone between discussing crude oil supplies with Mexico's state
oil company. "We're halfway through, and we still have a lot of work."

Long considered the ugly duckling of the oil industry, the refining
business is now in the spotlight as Americans complain about sticker
shock at the gasoline pumps and higher energy prices over all.

President Bush has taken notice. Last month, Crown Prince Abdullah
of Saudi Arabia, visiting the president at his Texas ranch on April 25,
chided him with the message that his country could send more oil, but
the United States would not have the ability to refine it. Soon
afterward, Mr. Bush offered to provide closed military bases for new

Over the last quarter-century, the number of refineries in the
United States dropped to 149, less than half the number in 1981.
Because companies have upgraded and expanded their aging operations,
refining capacity during that time period shrank only 10 percent from
its peak of 18.6 million barrels a day. At the same time, gasoline
consumption has risen by 45 percent.

But in the last two years, the refining business has experienced a
revival of sorts, leading some refiners to predict they have entered an
age of higher margins and better returns. Not everyone agrees, but for
the first time in a long time the industry is more confident about
itself. Even with better economics, however, it is still tough to build
a refinery from scratch. Mr. McGinnis says he is not afraid of the
challenge. He and his staff work in a small office in Phoenix, mostly
consumed these days with securing permits and looking for financial

The next step is to complete an environmental impact statement for
the federal Bureau of Land Management. That will include an assessment
of the refinery's impact on underground water sources and endangered
species, as well as its effect on any Native American burial grounds.

After that, the project needs to get the site's zoning changed by
Yuma County from agricultural to heavy industrial; Arizona's
preservation office needs to be convinced that the refinery does not
trample on any ancient historic site or trail; and finally, the project
must apply for a presidential permit, which is issued by the State
Department, to allow the crossing of a 200-mile pipeline into Mexico.

The business of turning crude oil into gasoline, jet fuel or heating
oil has rarely been a lucrative proposition. It has dismal profit
margins compared with its more glamorous cousin, exploration. It is
highly cyclical and fairly unpredictable, because demand for gasoline
swings sharply by season. And because of low oil prices over the past
decades, refiners have been forced into cutthroat competition that has
driven many of the smaller refiners out of business.

More refining capacity will almost certainly be needed. Gasoline
demand is forecast to rise 39 percent by 2025, to 12.9 million barrels
a day, up from today's 9.3 million barrels, according to a long-term
outlook by the Energy Information Administration. By then, gasoline
alone will account for nearly half the crude oil consumed in the United

By contrast, domestic refining capacity is expected to grow only by
0.8 percent from 2005 to 2007, slightly less than the 0.9 percent
increase registered between 1998 and 2004, according to Jacques
Rousseau, an oil analyst with the investment banker Friedman, Billings,

Jay Saunders, who follows oil companies for Deutsche Bank,
said that the increase in refining margins would lead to increased
capacity. "The industry is definitely going to overbuild," he said,
"they have in the past and they will in the future."

Others caution that the industry should be wary of recreating a glut
of capacity that would cause profit margins to sink again. "Refining
has been a cyclical business for a long time," said Bill Hauschildt,
the vice president for global refining with ChevronTexaco. "In the past few years, there's been much more discipline in the market for not overbuilding capacity."

Part of the issue, according to refiners, is that substantial
investments were made over the last decade to lower carbon emissions
and meet low-sulfur fuels regulations. The American Petroleum Institute
estimates the industry invested $47 billion on such investments. More
investments will be needed through 2007 to clean up gasoline and diesel.

"This is going to cost you money and the only thing you will get is
cleaner air and less emissions - which are good - but no new capacity,"
said Edward H. Murphy, the industry group's general downstream sector

"What refiners need are clear guidance on what's permissible and
what is not if they want to expand," Mr. Murphy said. "So far, that has
not been very clear."

To make up for the domestic shortfall, gasoline imports from Europe
and South America have been rising in recent years. Gasoline imports
now account for nearly 10 percent of domestic consumption and have
exceeded a million barrels a day on average throughout April.

But even as the United States grows more reliant on foreign
gasoline, it will face mounting competition from other buyers where
demand is similarly growing, like China and India. "More competition
means imports might become more expensive," said Joanne Shore, an
analyst with the government's Energy Information Administration.

For Bob Slaughter, the president of the National Petrochemical and
Refiners Association, the industry's main trade group, "The question
now is to keep the growth in imports at a reasonable level." He expects
additional capacity will come from expansion of existing projects and
not from the construction of new refineries like the one in Arizona.

Even if all goes to plan and investors are found, Mr. McGinnis's envisioned refinery will not be ready before late 2009.

The prospect of a new employer, 3,000 construction jobs and 600
permanent posts has done a lot to outweigh concerns over the project,
said John Nussbaumer, the mayor of Wellton, a city of 1,900 people
about 20 miles from the refinery site.

"Of course I am concerned about the effects on the environment," he
said. "Would I rather see it somewhere else? Yes. Would I oppose it at
this time? No. It's been too long since a new refinery was built in the
United States. Anything we can do to reduce our dependency on the
Middle East is a good thing."

AMP Section Name:Energy

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