As Oil Prices Soar, First New American Refinery Since 1976 Set to Be Built

Glenn McGinnis hikes up a dusty ridge off Interstate 8 near Wellton, Ariz., to show off a barren patch of scrubland that may become home to a rarity: the first American oil refinery to be built in almost three decades.There will be more hills to climb. Mr. McGinnis, 55, chief executive officer of Phoenix-based Arizona Clean Fuels LLC, must secure two dozen government permits for the $2.5 billion project, close a deal for crude from Mexico, and pull together investors that may include Saudi Arabia’s state-owned oil company.American gasoline prices above $2 a gallon and demand at a record level are boosting refinery profit margins and giving the project a fighting chance, says Mr. McGinnis, who has run five refineries in America, Canada, and the Caribbean.“I wouldn’t say it’s going to be easy, but we’re further along than anybody else,” said Mr. McGinnis, a former vice president at Houston-based El Paso Corp. and manager of its largest refinery then, in Aruba, Dutch Antilles. “There’s a growing recognition that there is a shortage of refining capacity.”In the last 25 years, the number of American refineries has fallen by half, to 146 from 308 in 1979, according to the U.S. Department of Energy. The last one built was Marathon Oil Corp.’s plant in Garyville, La., dedicated in 1976.“Refineries have closed rather than make the capital investments required to meet increasing environmental regulations,” said Bill Greehey, 68, chief executive of San Antonio-based Valero Energy Corp., the third-largest American oil refiner. “More closures are expected, primarily smaller refineries.”Public and political opposition is a deterrent for those considering new construction, said Bob Slaughter, president of the Washington-based National Petrochemical and Refiners Association. Environmentalists in California, for example, sued last month to force ConocoPhillips, the largest American refiner, to use better air-pollution controls on a planned expansion of a refinery near Los Angeles.“There’s almost an unlimited amount of pressure points at which someone who is determined can bring further delay to this process,” he said.Even so, Arizona Clean Fuels is making progress on what would be its first plant. The group may gain a state air quality permit around January, says Steve Owens, director of the Arizona Department of Environmental Quality.An air permit is a milestone no othercompany has reached, Mr. McGinnis says. The permit would certify that pollution from the plant won’t keep the state from complying with the federal Clean Air Act.“Barring some major unexpected issue arising, I don’t see any roadblocks to this permit,” Mr. Owens said. A draft permit, likely in September, would be open to public comment for 60 days. If no major changes are needed, the permit would then be reviewed by the U.S. Environmental Protection Agency for as much as 45 days.Exxon Mobil Corp., the second biggest American refiner, has no plans for a new American plant and says refining profit margins won’t last.“It just doesn’t make sense to us,” says Ed Galante, head of Irving, Texas based Exxon Mobil’s refining and marketing business. Valero’s Mr. Greehey says it’s cheaper to expand plants that already have permits.While refinery closures over the last few decades have been partly offset by expansion and upgrades at remaining plants, total American crude oil processing capacity peaked at 18.6 million barrels a day in 1981.Capacity today is 16.9 million barrels, according to the U.S. Department of Energy.Gasoline consumption will reach 13.3 million barrels daily by 2025, 46% above this year’s 9.1 million average, the government estimates. Domestic refinery capacity will increase 29% over the same period, assuming no refineries are built.American refineries have run at 92.5% of capacity, on average, in the past 12 months, compared with 87.6% in 1990.Demand has been outpacing imports and domestic production, and American gasoline inventories have been below the five-year average for most of this year.“Domestic refineries are producing flat-out,” says Rep. Joe Barton, 54, a Texas Republican who heads the House Energy and Commerce Committee. “The lack of refining capacity needs to be addressed.”While oil prices surged this year above $47 a barrel amid concern that little excess oil production is left to cushion any supply disruptions, refiners’ profits also climbed because of high prices and robust demand for gasoline and diesel.The profit margin for refining oil into gasoline and heating oil – the difference between the price paid for crude and the prices received for refined fuel – has averaged $8.69 a barrel this year, more than double the $4.19 average in the 1990s.Retail gasoline nationwide is projected to average $1.83 a gallon this year, up 17% from $1.56 last year, according to the Energy Department. The average reached a record $2.06 in May. Heating oil in the Northeast, the largest U.S. market for the fuel, will average $1.57 a gallon this winter, up 15% from last winter, according to the agency.Still, the challenge of getting all the needed permits and the reluctance of investors make the chances for a new U.S. refinery “very slim,” says Colm Mc-Dermott, a refining analyst at John S. Herold Inc., a Norwalk, Conn.-based consulting firm.“To build a new refinery from scratch would be very expensive, and to see returns on that investment would take many, many years,” Mr. McDermott says.As energy legislation stalls in Congress, the Arizona project may be the next test of whether the balance between environmental concerns and energy needs is shifting in favor of new refineries.Republican-backed legislation to expedite permit approvals for new refineries passed the House 239 to 192 on June 16. It hasn’t been introduced in the Senate. Democrats say the measure would weaken clean-air and clean-water enforcement by giving the Department of Energy authority to override state and federal environmental laws.Arizona Clean Fuels, which is closely held and declines to name its investors, already has spent $30 million to plan the new refinery and seek permits. Construction is set to start in 2006 and refining to begin in 2009.The project calls for Mexican crude from the Gulf of Mexico to be shipped by Petroleos Mexicanos across the country via an existing pipeline, loaded onto tankers for movement up Mexico’s Pacific Coast to Puerto Libertad, then pumped through a new 200- mile pipeline across the American border to the Arizona refinery.Mr. McGinnis says his group already is negotiating with Petroleos Mexicanos, or Pemex, the Mexican national petroleum company based in Mexico City. The cross-border pipeline would cost about $500 million and the refinery about $2 billion, according to Arizona Clean Fuels.The refinery would have the capacity to process 150,000 barrels a day, above the American average of about 115,000 barrels. The biggest American refinery, Exxon Mobil Corp.’s Baytown, Texas, plant, processes 557,000 barrels daily.The proposed agreement with Pemex would require Arizona Clean Fuels to ship back to Mexico about 35% of the refined gasoline it produces, said Mr. McGinnis, who has spent 34 years in the oil business.In the late 1990s, he was CEO of closely held Orion Refining Corp. in Norco, La., and led a $1 billion expansion of Orion’s Norco refinery, which is now owned by Valero.Last year, Arizona Clean Fuels abandoned a site near Phoenix after residents objected and Governor Janet Napolitano, a Democrat, expanded ozone-pollution restrictions to include the refinery site.Mr. McGinnis said his group’s new site is remote enough to avoid not-in-my-backyard opposition. The 1,500-acre plot, a former citrus farm in the shadow of the rust-colored Mohawk Mountains, is 25 miles from the Mexican border and 30 miles from the Barry M. Goldwater Range, where Air Force F-16 fighters practice bombing runs.The nearest city, Wellton, population 1,800, is 20 miles away. Cattle feedlots and vegetable, wheat and cotton farms dominate Wellton’s economy.“It will be phenomenal for our community,” Wellton Mayor John Nussbaumer said after a town council meeting on May 26 at which McGinnis spoke. “We’re a small farming community. Wages are relatively low here. Job opportunities are few.”Mr. McGinnis says that winning an air-pollution permit will help him secure financing.The American subsidiary of Saudi Aramco, the state-owned oil company of Saudi Arabia, has held discussions with Mr. McGinnis in recent months, according to Mike Erspamer, who handles refinery joint ventures for the Houston-based unit. The Arizona project is among eight or 10 “prospects” for new or expanded refineries that might be funded by Saudi Aramco, he says.Mr. McGinnis says the Saudis are “one of many options” for funding. He declined to name others.Mr. Erspamer says Mr. McGinnis knows what it takes to win political and regulatory backing.“If anybody can get that thing pushed over the goal line, it’s probably somebody like him,” he said.

As Oil Prices Soar, First New American Refinery Since 1976 Set to Be Built

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