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Wall Street Journal on Heavy Crude

 Wall Street Journal
 Refiners Face Obstacles to Processing
 Cheaper, Dirtier Crude Oil
 June 12, 2008; Page A6
Refiners faced with rising prices for premium grades of crude oil are rushing to expand their ability to process less expensive, dirtier crudes, but their efforts face concerns about pollution and global warming.
Several expansion projects in the U.S. are being slowed by worries that the processing of heavier crudes produces more air pollutants and greenhouse gases that contribute to climate change. While environmentalists have long been critical of heavier crude, government officials responsible for signing off on expansion projects are echoing that unease and demanding countermeasures to reduce the amount of pollution.
Last week, an Environmental Protection Agency board refused to approve a permit for a refinery expansion proposed by ConocoPhillips and EnCana Corp. in Roxana, Ill., after environmentalists raised objections. In Richmond, Calif., Friday, the city's planning commission told Chevron Corp. it will restrict the crude the company can process once it upgrades its refinery there. And BP PLC is facing challenges from environmental groups to a proposed project in Whiting, Ind.
Refiners have had difficulty building plants because of community opposition and lengthy and complicated permitting processes. There have been no new refineries built in the U.S. since 1976. Refiners have circumvented these barriers by expanding existing facilities. Since 1985, U.S. refining capacity has grown 20%, even as the number of refineries has fallen, according to API, the oil industry's trade group.
Refiners plan to increase the amount of crude they process by 800,000 barrels a day by 2010, a 4.5% increase from current capacity, or the equivalent of four new refineries, API says. As rising oil prices outpace refiners' ability to pass along increases to consumers in a weak economy, they are looking for ways to cut costs. Because heavier crude is more difficult to process, it is less expensive than premium grades, such as West Texas Intermediate, or WTI. Prices for WTI have jumped more than 30% since the beginning of the year to more than $130 a barrel, while Mexican Maya, a heavy grade, has gone up 27% to about $105.
Meanwhile, oil producers are bringing more heavy crude into the market, a trend industry officials expect to continue. In particular, refiners are working to expand production from the Canadian tar sands, which hold large reserves of ultraheavy oil.
But expansion and upgrade plans that would allow refiners to take advantage of the heavier crude are increasingly coming under fire. Opponents to projects cite global-warming concerns, but they also are becoming more exacting in their criticism to pollution in general.
"It is going to cause vast increases in CO2 emissions; it's a huge issue that you have to confront," said Ann Alexander, an attorney at the Natural Resources Defense Council, an environmental group that is challenging the Roxana and Whiting projects.
The mounting opposition to refining projects comes as oil companies are under pressure from lawmakers and the public to do something about skyrocketing oil and fuel prices. If they can't process more heavy crude, refiners likely would have to pass more of their costs to consumers at the pump. The increased objections are delaying projects and could derail project economics if refiners can't process the cheaper crude or are required to add equipment or staff to address the concerns, industry experts say.
Refiners say limits on greenhouse-gas emissions being developed by the federal government also could throw a wrench into their plans to use heavier crudes, particularly crude from Canadian tar sands. Among the biggest threats: potential laws that would penalize fuels derived from heavier, more carbon-intensive sources.
Refiners say such rules don't make sense at a time when the government is pushing to minimize demand for Mideast oil.
"We have all these facilities that we, as domestic refiners, have spent billions of dollars upgrading so we can run Canadian crude, and then [the government] is going to turn around and say there's going to be a significant penalty in using those?" says Charles Drevna, president of the National Petrochemical and Refiners Association, an industry group. "And in the meantime, everyone's complaining about the price of a gallon of gas."
While processing heavy crude makes economic sense, breaking down thick, sticky crude into light fuels such as gasoline or diesel requires more energy, which means more greenhouse-gas emissions, says Thomas O'Connor, senior manager at ICF International, a consulting-services company.
In Richmond, Chevron wants to upgrade its refinery to be able to process higher-sulfur crude, among other reasons. In the past, regulators have mostly stuck to restricting what comes out of the refinery, not what goes in. But Richmond's planning commission, which is vetting the project, is siding with activists who complained about the environmental impact of the dirtier fuel.
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