HOUSTON (Reuters) – Royal Dutch Shell and Saudi Arabia’s state oil company announced Friday they would go ahead with a $7 billion expansion of a jointly-owned Texas refinery that will make the plant one of the biggest in the world.
The expansion will add 325,000 barrels per day of capacity to the companies’ 285,000 bpd Port Arthur, Texas refinery even as a third of the planned capacity expansions announced by U.S. refiners have been scrapped amid surging costs.
“We are now confident that we can deliver this project at the $7 billion level and in the time frame — by 2010,” Rob Routs, head of Shell’s downstream operations, told reporters on a conference call.
Tight oil refining capacity worldwide has made refining hugely profitable for the first time in decades, spurring large expansions and the construction of new refineries, particularly in the Middle East and Asia.
Capacity shortages, particularly in the aging U.S. refining sector, have also increased the vulnerability of oil markets to sudden price spikes on plant outages.
Motiva Enterprises LLC, the U.S. refining and marketing joint venture between Shell and Saudi Aramco, had been looking at a major expansion of one of its refineries since 2004. At the time, the project was expected to cost over $3 billion.
However the cost of refinery expansions has increased dramatically amid a global construction boom that raised prices for cement and steel as well as heavy investment in the energy industry that has boosted the cost of sophisticated pressure vessels and skilled labor.
The rising cost environment led to speculation that Motiva would scrap the Port Arthur expansion after the final investment decision was postponed several times.
Routs said Motiva had delayed a decision on the refinery’s expansion so that it could have a “firm grip on the capital estimate and timing” of the project.
Shell’s decision to plow billions into the U.S. refining sector comes just weeks after company officials warned that world oil refining capacity was poised to enter a period of oversupply amid massive expansions worldwide.
“Every time you take a step forward you have to reevaluate the economics, you look at the costs, you look at the materials,” said Motiva chief executive William Welte in an interview.
“Our view is (US) demand will continue to grow,” Welte said. “Gasoline is still going to be the primary fuel.”
Shell has moved aggressively to dispose of the higher cost refineries in its portfolio. This year alone Shell has sold three French refineries and another in Los Angeles.
The European refineries put up for sale by Shell were high-cost operations which would have difficulty competing in a low margin environment due to declining gasoline demand in Europe, Routs said.
The expansion is being built by a joint venture between Bechtel and Jacobs Engineering TEPPCO Partners LP is building an oil products storage facility to support the expanded refinery while Sunoco Logistics LP is building a crude oil tank farm.
Shell closed down 0.53 percent in London at 20.81 pounds.