London, 5 August 2011: Reuters

Refineries across the Midwest processed exceptional volumes of crude during June and July, defying a nationwide slowdown, and helping avert a threatened oil glut in the region arising from strong Canadian imports and rising production in North Dakota and other shale fields.

Midwestern refineries processed 3.46 million barrels per day in June and July, 3.5 percent above the five-year average, and as much as 93.5 percent of their maximum capacity. In contrast, refiners in the rest of the country reported throughput was flat or lower than usual, with operating rates below 90 percent, and as low as 75 percent at refineries along the east coast.

But with the end of the summer peak refining season later this month, and refiners preparing for routine maintenance in September and October, crude stockpiles across the midcontinent look set to start rising again. Pressure on storage is set to re-emerge and timespreads look set to weaken further.

Some analysts have suggested Midwest refiners will postpone planned maintenance to capitalise on strong margins, keeping throughput high and averting a large stock build. But this likely overstates the flexibility they have to make last-minute changes to maintenance programmes which have been planned for two years or more ahead.

LIMITED FLEXIBILITY

U.S. refining operations show a clear seasonal pattern, with processing peaking between late June and late August, as refiners meet strong gasoline demand from motorists during the summer driving season. Output then falls sharply from the first two weeks in September

US Refinery Operations GRAPH

While production from a single refinery is highly variable (owing to planned turnarounds, smaller planned shutdowns, and unplanned outages) operating rates for the country as a whole, or any of the major refining regions, are much more stable and predictable.

Maintenance is a complex and expensive process that must be planned months and years in advance, so there is little scope to alter the schedule opportunistically to take advantage of favourable conditions and margins.

In a 2007 study for the U.S. Congress, the Energy Information Administration identified three main types of shutdown: major planned turnarounds (which typically shut production for 20-60 days); smaller planned shutdowns (lasting 5-15 days); and unplanned outages (including emergency shutdowns, some of which may be prolonged).

For a major turnaround, planning begins 24-36 months in advance, and detailed planning starts 12-18 months ahead, when long lead-time materials are ordered and contractors are engaged.

Major turnarounds require 1500-2000 staff, most of whom are engaged from specialist contracting firms. Since refinery contractors are highly skilled and in short supply, and the number of specialist firms in this area is small, there is a limit to how many refineries can undertake turnarounds at the same time, and contracts must be booked and finalised many months in advance.

One 29-day turnaround at the St Charles refinery in 2006 cost $39 million and used 1800 outside contractors, according to the EIA ("Refinery Outages: Description and Potential Impact on Petroleum Product Prices", March 2007). It was estimated that every day over-run would have cost $1.2-3.0 million.

Major turnarounds cannot easily be postponed or rescheduled even in response to favourable refining margins. There is more flexibility around smaller, planned shutdowns, but even those are normally planned 2-6 months in advance. Short postponements may be possible, but a prolonged delay increases the risk of system failures and unplanned outages later on, so the extra risk and expense typically outweighs the advantages.

"The size and complexity of a refinery turnaround leaves little flexibility to change plans. The large commitments for labour, equipment and materials needed for process improvements make changes very costly at best, and safety concerns can override all other considerations," according to the EIA.

"Smaller outages may have some flexibility, but even this varies, depending on the reason for the outage and the associated safety and reliability concerns". There is no evidence refiners can respond to short-term changes in margins by making last-minute changes to maintenance schedules on a scale big enough to affect market balances.

So refinery throughput looks likely to begin its normal seasonal decline in about five weeks time. When it does stocks around Cushing and across the rest of the Midwest are set to rise, putting WTI timespreads under even more pressure.

Ends --

By John Kemp, Reuters market analyst – for Commodities Now.

The views expressed here are his own.