Motiva Enterprises made a huge bet Friday that America's appetite for gasoline will keep growing well into the future, giving final approval to a $7 billion expansion of its Port Arthur refinery that will make it the largest in the nation.
The decision came after more than three years of study by Motiva, a joint venture of Royal Dutch Shell and Saudi Arabia's state-owned oil company, and after a jolt in costs doubled the project's price tag.
With the move, two of the world's biggest oil companies have signaled their belief that petroleum-based fuels are here to stay despite the growth of biofuels like ethanol and calls to curb U.S. gasoline use.
It also suggests the companies see more road ahead for the domestic refining industry's recent profit run, despite its history of boom and bust cycles.
"Even at this kind of investment level, this is still a very attractive project," Rob Routs, Shell's top global refining operations executive, said in a conference call with reporters Friday.
Recent increases in the cost of building materials and labor, along with concerns about the long-term demand for gasoline, have pushed some refiners to delay or cancel expansion projects.
As recently as May, the American Petroleum Institute said refiners planned to boost the nation's refining capacity almost 11 percent through expansion projects representing 1.6 million barrels a day. Now, the trade group says only about
1 million barrels a day in projects will go forward.
Material costs rose as a spate of refiners launched expansion projects simultaneously to take advantage of high refining profits, while labor costs spiked because of a shortage of construction workers after the 2005 Gulf Coast hurricanes. The cloudy demand picture, meanwhile, is the result of proposals in Congress that could greatly boost the nation's ethanol output and also create higher fuel economy standards for cars and trucks, both of which could weaken demand for gasoline.
President Bush also has set a goal to cut gasoline use 20 percent by 2017.
Given those challenges, it is highly significant that Motiva decided to move forward with its Port Arthur expansion, said Mike Wilcox, head of global downstream consulting for Wood MacKenzie in Edinburgh, Scotland.
"On balance, I'd say it gives a positive message to other refiners," he said.
Most U.S. refineries now run near their peak, and still do not produce enough gasoline to keep up with Americans' demand for gasoline. To make up the shortfall, the U.S. imports about 10 percent of the gasoline it consumes each year.
Motiva CEO Bill Welte said those factors helped persuade the company to expand in Port Arthur, even though the partners considered pulling the plug when costs ballooned. "That was always an option," Welte said in an interview.
Expected to be complete in 2010, the expansion will more than double the Motiva facility's oil-processing capacity to about 600,000 barrels per day. That will make it the nation's largest refinery, edging out an Exxon Mobil Corp. facility in Baytown that processes nearly 563,000 barrels per day.
Exxon Mobil spokeswoman Prem Nair said the world's largest oil company had no plans to match Motiva in order to retain the top spot.
Along with the expansion, Motiva is also adding equipment that will allow the Port Arthur plant to process a broader range of crude oils.
Prices for light, sweet crude recently have hit records as refiners in the Far East have snatched it up to feed rising energy demands, Routs said.
But Port Arthur will now be able to run heavy, sour crudes found in South America and thick tar sands from Canada, which can be produced at roughly $20 per barrel less than lighter crudes, he said.
Motiva said the project will create 300 new jobs, produce lower emissions per barrel of oil put through the system and spur more development in the region.
Though Port Arthur encouraged the plant expansion with tax incentives, Mayor Deloris "Bobbie" Prince still called the Motiva project a "gift from God."
"The quality of life for the people of this town will never be the same as of this morning," Prince said Friday.
Hilton Kelley, a community activist, said he will be watching to make sure Motiva makes good on promises to the area, including the installation of more air-monitoring devices at the plant.
"They have answered a lot of our concerns," Kelley said. "But we are not totally 100 percent satisfied with the expansion."
Motiva has been preparing the Port Arthur site for the expansion for more than a year. Hundreds of construction workers have been coming and going. Recently, they began driving pilings to undergird what essentially will be a new refinery connected to the original one.
That's why word of the final investment decision, even if it took awhile, was not totally unexpected Friday.
Said Routs: "We haven't been exactly hiding the fact that we wanted to do this."
