March 27, 2007
Chairman Jeff Bingaman of the Senate Committee on Energy and Natural Resources requested that EIA conduct a study of the impact that refinery shutdowns have had on the price of oil and gasoline.1 Up until the mid 1990's, the U.S. had excess refinery capacity. Refinery utilization in 1985 averaged 78 percent, and refinery outages seemed to have little if any impact on product prices, since a substantial amount of extra capacity existed to compensate for outages. Between 1985 and 1995, demand grew, while refinery capacity remained relatively flat, resulting in utilization increasing to 92 percent by 1995. Since then, U.S. refineries have been running near capacity during the peak-demand summer months. With little spare refinery capacity available during peak demand times, unexpected refinery outages can result in local supply disruptions that result in temporary price surges. Still, refinery outages do not always result in price pressure. Other factors can influence the impact that outages have, such as the time of year relative to seasonal demand peaks, availability of imports, availability of inventories, and even what has transpired in the market place in the prior weeks. The remainder of this summary provides brief answers to the questions posed in Chairman Bingaman's request.
There are various types of outages, one of which is the refinery turnaround. A refinery turnaround is a planned, periodic shutdown of one or more refinery processing units (or possibly the entire refinery) to perform maintenance, inspection, and repair of equipment and to replace process materials and equipment that have worn out or broken, in order to ensure safe and efficient operations. It is analogous to the major maintenance performed on automobiles, but much more complex. Often, improvements in equipment or the processing scheme can only be implemented during these turnaround or shutdown periods.
Currently, routine turnarounds on key fuel production units are planned for every 3-to-5 years. They may involve 1-2 years of advance planning (sometimes more when major processing or equipment changes are needed) using dedicated teams from the company as well as outside contracting and engineering firms. While the objective is to minimize the time a unit is offline, the turnaround can result in a unit being offline for several weeks to several months. During a major unit turnaround, as many as 1500-2000 skilled contractor workers may be brought on site to perform a myriad of interrelated jobs that require significant coordination and safety measures. Additional personnel vary depending on the circumstances, but it is not unusual to see staff more than triple during a turnaround.
Refinery turnarounds are planned, but they are not the only planned outages. There are less extensive planned shutdowns, which are planned, targeted shutdowns of smaller scope. These "pit stops"? help to bridge the gap between planned turnaround intervals, but still require much coordination and oversight due to the interrelationships among units in a refinery and the complexity and hazardous nature of the processes involved.
Unplanned shutdowns also occur. Some unplanned shutdowns do not require immediate emergency actions, and an affected unit can continue to operate for several weeks, providing some room for planning, including material and equipment purchases, before the shutdown. Emergency shutdowns must sometimes be made however. In this case, a unit or entire refinery must be brought down immediately without warning. For example, a fire or power outage could create such a shutdown requirement.
Planned turnarounds and shutdowns can also result in unplanned outage time. Sometimes when a processing unit is brought down for planned maintenance, other problems are discovered that may extend the time offline.
Outages occur most frequently in the first quarter and in the fall. These times are when total U.S. petroleum product and crude oil demands are at their lowest points seasonally. Within those periods, other factors affect turnaround and shutdown timing, such as availability of labor, given the very large swings in skilled workers needed for turnarounds. For example, holidays and hunting season are avoided. Since adequate skilled workers are not available to handle simultaneous large turnarounds, contract and engineering firms cannot schedule such activities at the same time. Various sources of information are available to assist in avoiding clashing projects. The contractor and engineering firms themselves are important players. Large turnarounds require enough outside contracting that plans become known even when companies do not announce them. Private information sources like Industrial Information Resources publish information on such plans, and the trade press picks up public announcements as well as information on shutdowns that must be provided to organizations such as the Texas Commission on Environmental Quality, which requires filings on operational changes that may result in potential changes in emissions.
The size and complexity of a refinery turnaround leaves little flexibility to change plans. The large commitments for labor, equipment, and materials needed for process improvements make changes very costly at best, and safety concerns can override all other considerations. Smaller outages may have some flexibility, but even this varies, depending on the reason for the outage and the associated safety and reliability concerns.
Variations in production as a result of outages can be large for individual refineries. EIA examined individual refinery production from 1999-2005, comparing the highest production year to the lowest production year for a representative subset of facilities. In the Gulf Coast region, represented by Petroleum Administration for Defense District (PADD) 3, for example, the refinery that showed the smallest difference in gasoline production between its best year with no major outages and worst outage year experienced an 8.2 percent drop, while the refinery that showed the greatest gasoline production decline fell 33.0 percent from its best year without major outages. That is, for PADD 3, assume each of the refineries produced gasoline at 100,000 barrels per day when not experiencing any outages (Figure ES1). In PADD 3, the refinery showing the least production impacts from outages only dropped 8.2 percent from its level with no outages, which, in this illustration, would have reduced its gasoline output to 91,800 barrels per day. However the refinery that experienced the worst loss of gasoline from outages dropped 33.0 percent, which would bring its production down to 67,000 barrels per day in this example. The Midwest and East Coast regions did not see quite the same percentage drops in production with major outages of lower complexity refineries. The largest drop in the Midwest was about 26 percent from maximum production, and on the East Coast the largest drop was about 20 percent.
EIA data were used to examine the relationship between input variations that reflected outages and product production on an individual refinery basis. EIA data do not reflect outages directly, but EIA collects unit input data that will drop significantly when a unit is out of service. Because units such as the fluid catalytic crackers (FCC) and alkylation units can account for as much as 50 percent of a refinery's gasoline production, an FCC outage can have a large impact on overall production. However, the impact of shutting down such a unit may be larger than 50 percent of gasoline production. A refinery cannot usually simply shut down one unit and continue to run the other units at the normal rates. Other units contributing to gasoline production may also be pulled back. For example, refineries typically have inadequate storage to hold the material coming from the crude oil distillation tower to the FCC unit. Even if such storage existed, the FCC unit would not have adequate capacity to run the stored feedstock later.
Within the limitations of the monthly and weekly data available, EIA's statistical analysis of outages indicates that generally there is not a significant price impact. Prices are affected not by production changes alone, but mainly by the balance in supply and demand, as represented by inventory levels. If supplies are abundant relative to demand (e.g., high inventories and off peak time of year), a refinery outage, even an unplanned outage, is likely to have little impact. The lack of a statistical relationship between outages and gasoline crack spread may be surprising to some analysts. Keep in mind, the statistical analyses used are designed to capture normal market variations and responses, and while they indicate that most of the time, outages have little impact on prices on a monthly average basis, they do not imply outages never affect prices. There are times when the marginal supply of barrels lost due to outages have added to price pressure, such as when a tight market balance already exists and alternative supply sources are not readily available. Clearly the outages that occurred during Hurricanes Rita and Katrina were large enough to impact price. Another case was highlighted in an earlier report on California gasoline where several large unexpected outages in conjunction with tight gasoline market conditions seemed to drive up prices. However, outages with measurable impacts on monthly prices are relatively rare.