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Within a Month, Which Refinery Will Be the Largest in the US?

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Eagle Ford Shale Project, Seaway reversal, and other factors favor expansion of Saudi-Shell's Port Arthur refinery in Texas.

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While US Northeast refineries such as ConocoPhillips' (COP) Trainer as well as Sunoco's (SUN) Girard Point and Marcus Hook are on the verge of shutting down if a buyer is not found, the historic Port Arthur refinery near Sabine Lake in East Texas is about to complete a massive expansion.

Continually improving exploration and production technology will allow for significantly greater oil recovery from the Eagle Ford shale and Permian Basin in Texas – aggregate flow from these regions is expected to multiply several times over within the next few years. Increased flow from the Bakken Shale in North Dakota and Athabasca Oil Sands near Alberta, along with the reversal of Enbridge (ENB) and Enterprise Products Partners' (EPD) Seaway Pipeline, will also add to the vast quantity of oil moving toward Gulf Coast refineries such as Port Arthur.

After the Port Arthur project is completed within the next month, the 110-year-old facility's throughput capacity is expected to more than double to 600,000 barrels per day ("bpd"). It will rank as the largest in the United States (measured by operable capacity) and among the top 10 in the world. Following expansion, it will surpass the largest US refinery, ExxonMobil's (XOM) Baytown, by approximately 40,000 barrels. The Port Arthur refinery currently handles 285,000 bpd and is the 15th largest in the country. For the sake of scale, the world's largest is Reliance Industry's 1.24 million bpd facility located in Jamnagar, Gujarat, India.

The operation is owned by Motiva Enterprises, a joint venture of Saudi Refining, Inc. and Shell (RDS.A). Each entity owns a 50% share of the JV. Saudi Refining is a subsidiary of the Saudi Arabian national oil company, Saudi Aramco.

Although expansion plans were drawn up almost six years ago, the project's completion is well timed – with the reversal of the Seaway pipeline approaching, the refinery, along with others situated in the region, will benefit from domestic oil that is currently contributing to a supply glut in Cushing. As of last Friday, according to the Energy Information Administration ("EIA"), there were 41.2 million barrels of oil stored at the pricing point – this is the highest level since last May. The reversal will also decrease reliance on waterborne crude. Bentek Energy, an energy market analytics company, expects foreign imports of crude oil into the Gulf Coast region to plummet by 40%, or 1.9 million bpd, to 4.914 million bpd by 2016.

The shifting refining trends will increase pressure on the PADD 3 / Gulf Coast region to supply both PADD 2 / Midwest and PADD 1 / East Coast with refined products. PADD is an acronym for "Petroleum Administration for Defense Districts," and is used by the EIA, among others, to organize oil-related data reporting among geographical regions. As of April 13, removing PADD 5 / West Coast from the refinery picture (as it is relatively self-sufficient), PADD 3 makes up 61.4% of the country's refinery operable capacity.

In the past 60 years, the United States has seen the number of refineries cut almost in half. Perhaps the escalation of shale oil production in the coming years will finally bring the trend of refinery closures to a halt. In addition, the potential for increased flow from the Athabasca Tar Sands (conditional on a favorable decision regarding Keystone XL in 2013) may cause refinery overutilization, which would bring about further expansion of existing facilities as well as the possible construction of new ones.
No positions in stocks mentioned.

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