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Congress irked over oil profits


STAFF WRITER
November 8, 2005

Exxon Mobil Corp. and BP Plc are posting record refinery earnings because of supply cuts caused by Hurricanes Katrina and Rita, and surging global demand. And profits might be poised to increase.

Consumption is rising twice as fast as refinery capacity, said Morgan Stanley analyst Doug Terreson, who predicted a "Golden Age of Refining" in a report three years ago. The average U.S. profit margin for turning a barrel of oil into gasoline and heating oil exceeded $15 a barrel in the third quarter, almost triple what it was two years earlier.

Not until the end of the decade "will there be enough new capacity globally in order to temper refining margins," said Jacques Rousseau, an analyst with Friedman Billings Ramsey & Co.

"Refiner earnings should be very strong" for several years, Rousseau said.

The record profits are spawning complaints among lawmakers. Oil executives including Lee Raymond, chief executive of Exxon Mobil, have been asked to appear this week at hearings called by U.S. Senate Majority Leader Bill Frist. Speaker of the House Dennis Hastert, R.-Ill., chided oil companies last month for not investing enough in new refineries and pipelines.

"We expect oil companies to do their part to help ease the pain that the American families are feeling from the high energy prices," Hastert said.

Some lawmakers have proposed new taxes on oil company profits, though Hastert rejected that approach.

Exxon Mobil, BP and Royal Dutch Shell Plc are the world's three largest refinery owners, followed by state-controlled companies in China and Venezuela. Shares of Exxon Mobil are up 13 percent this year, and BP's stock has gained 26 percent. Royal Dutch Shell shares have dropped 4.4 percent since July, when the company combined separately traded shares.

Exxon Mobil, BP, Shell and ConocoPhillips, which together make about 17 percent of the world's fuel, earned $18.5 billion from their refinery businesses in the first three quarters of this year. That is a 32 percent increase from a year earlier and equivalent to $474 million a week.

Valero Energy Corp., the biggest U.S. fuel maker, last week said it had a record $862 million profit in the third quarter, almost double the amount it recorded a year earlier. The San Antonio-based company's profit is likely to be almost $4 billion this year and $5.4 billion next year, according to the average estimate among four analysts surveyed by Thomson Financial.

"We are short refining capacity, both nationally and worldwide," Valero Chief Executive Bill Greehey said in an Oct. 31 interview. Greehey, who is stepping down as chief executive after three decades leading the company, said it will take at least two or three years before U.S. refinery capacity catches up to rising fuel demand.

Refinery Returns

Crude oil fell 1.1 percent last week to $60.58 a barrel on the New York Mercantile Exchange. Benchmark New York oil futures touched a record $70.85 on Aug. 30. They have tripled in price in the past four years.

Refining probably has never been more profitable in the U.S., said Neal Davis, a U.S. Energy Department economist who has been tracking oil-industry returns since 1993.

"Given how high margins are, it's safe to presume this year will break all the old records," Davis said in a telephone interview.

The return on investment for U.S. refineries touched a record 14.7 percent in 1988, Energy Department data show. Then returns went into a four-year slide, at the end of which companies on average were making nothing on their refinery investments.

New Investment

Profitability collapsed in the early 1990s after the Persian Gulf War triggered higher crude-oil costs that weren't matched by higher gasoline prices.

The opposite happened this year, when Hurricanes Katrina and Rita disrupted refineries along the Gulf Coast in Mississippi, Louisiana and eastern Texas. As much as 30 percent of U.S. capacity was off line after hurricane Rita struck in late September.

The average U.S. gasoline pump price jumped above $3 a gallon for the first time in early September, less than a week after Katrina barreled through Louisiana.

Almost 5 percent of U.S. refinery capacity remains shut, including plants along the Mississippi River near New Orleans that were flooded when the levees failed.

While U.S. refiners have spent money to expand the capacity of existing plants or meet stricter environmental requirements in recent years, the last entirely new domestic refinery opened almost 30 years ago. High costs and environmental restrictions make it difficult to build an entirely new refinery in the U.S.

Higher Prices

As prices have soared this year, some expansion projects have been announced. Philadelphia-based Sunoco Inc., the biggest refiner in the U.S. Northeast, will invest about $600 million over three years to boost capacity by 11 percent, Chief Executive Jack Drosdick said Nov. 2.

James Mulva, chief executive of ConocoPhillips, the second- largest U.S. refinery, in April announced plans to spend $3 billion over four years to expand refineries and add equipment to process cheaper grades of high-sulfur crude oil. Mulva is scheduled to release more details on the expansion in a Nov. 16 presentation to analysts in New York.

Morgan Stanley's Terreson doesn't expect the capacity increases to keep up.

"Growth in capacity is unlikely to be significant in coming years," Terreson said in a Sept. 27 report. He said he remains bullish on the refining business, and he predicted that next year will be "the best year thus far in 'The Golden Age of Refining'."

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