Experts See End of PES Operations as Pure Refinery

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Whatever the future may hold for the shuttered Philadelphia Energy Solutions (PES) facility in the US Northeast, sources say continuing to operate as a refinery is the least likely option. Everything from the social and political atmosphere in the region to long-standing logistical hurdles to new downstream capacity coming on line makes maintaining the 330,000 barrel per day facility as a refinery a high-stakes gamble with little room for success, according to refining personnel and sources familiar with the matter. PES is now being auctioned off, with final bids submitted last Friday. Only one of the bidders proposes to keep the facility running as a refinery, sources said, while others want to make use of existing infrastructure to turn PES into a terminal -- a fate reminiscent of another old East Coast refinery, Marcus Hook (OD May21'12). Renewable energy production, including solar and biofuels, also figure into proposals for the site. Should the refinery cease to function as it has, recent patterns of product supplies to the US Northeast will become more structural, with imported volumes of gasoline from Europe helping to fill a gap in regional balances that is likely to shrink as demand continues to peter out. In addition, 1,200 workers will need to find new jobs, and the oldest downstream oil unit in the country will finally end operations. PES’ recent history has been fraught. The refinery was saved from closure at the start of the last decade when Carlyle Group bought it from Sunoco (OD Jul.3'12). The new ownership invested heavily in capacity to source surging volumes of domestic crude by rail -- the US Northeast has no pipeline access to shale plays -- but as midstream companies alleviated bottlenecks and added pipelines to the US Gulf Coast, the price distortions that favored crude-by-rail to a large degree disappeared (OD Jun.24'19). As PES’ bet on crude-by-rail soured and regional demand for gasoline and diesel stagnated, the company was forced to declare bankruptcy once more. A court restructured PES’ debt, which included hundreds of thousands of dollars owed to painters and millions owed to engineering firms, only for the agreement to blow up -- literally. In June 2019, an explosion so large its heat signature could be observed from space rocked PES and destroyed roughly half of its infrastructure. The market moved quickly to adapt to the loss of some 190,000 b/d in gasoline supply, but the destruction proved insurmountable and PES once again entered bankruptcy (OD Nov.27'19). PES' current owners reserve the right to maintain ownership of the facility and keep it running as a refinery depending on how bids address insurance payouts related to the explosion and the results of an ongoing lawsuit regarding taxes. Downstream sources say myriad challenges face PES should it continue to refine oil. One regional refiner said PES’ equipment was in poor shape and that the site required significant environmental remediation, rendering it a difficult investment in an area already challenging for the oil and gas industry. More structurally, there is a lack of midstream access to discounted domestic crude. Without such infrastructure, PES would need to source imported crude or rely on rail, which only functions economically at wide price differentials. “They keep talking about building lines to the Gulf Coast but they should be building one to here,” one United Steelworkers union member told Energy Intelligence, although he acknowledged that such a project is extremely unlikely given environmental concerns on the US East Coast. That same environmental concern is a challenge in and of itself. “One driver is how much the politics in Philadelphia and Pennsylvania have changed,” one East Coast downstream source said, noting that the state government had helped subsidize Delta Airlines’ purchase of a refinery in the region in 2012. In contrast, he said, there is no drive from any side other than the union employees who staff PES to keep the facility running as a refinery. In addition, the downstream industry just went through a sea change with new marine fuel sulfur specifications from the International Maritime Organization, and the new framework has allowed potential competitors for market share to proliferate. Lime Tree Bay is restarting the shuttered Hovensa refinery on St Croix in the Caribbean, for example, and this means more suppliers of refined fuels will be vying for market share in the Atlantic Basin. Frans Koster, New York

Oil Demand, Oil Inventories, Oil Supply, Midstream Companies
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