Refinery bottleneck to ease

In a move that could bode well for Americans' gas tanks, the oil industry is quickening its pace of investing in more refining capacity.

Over the past two months, energy companies have announced refinery expansions of almost 1 million barrels of oil per day - nearly 6 percent of the amount of gasoline produced today. More announcements may come this spring.

One expansion already being planned is here at the Marathon Oil refinery - built on a former sugar-cane plantation - which sustained no significant hurricane damage.

If the oil companies follow through on their plans, this would be equal to 50 percent of the expansions over the past decade. The new capacity could help to relieve the persistent tight supplies and price run-ups at the pump, as happened this fall in the wake of hurricane Katrina.

Increasing refining capacity has been the subject of congressional hearings this fall. And related legislation is pending in Congress.

"It looks like refining investment is on the uptick," says Robert Slaughter, president of the National Petrochemical & Refiners Association in Washington. "But there are two cautions: All these additions must be permitted, and people can change their minds."

Among those who have announced expansions are Valero, adding an additional 400,000 barrels per day, and Chevron and ExxonMobil, each adding 75,000 barrels per day. Suncor, Motiva, and Citgo also have expansion plans.

Companies prefer expansions - that is, adding more refining facilities - instead of building new ones on different sites because it's faster and will probably not require new zoning.

Overall, the new planned capacity is expected to come on line in three to five years.

"The pace is quickening," says Mark Routt, an energy analyst at Energy Security Analysis Inc. in Wakefield, Mass. "Even smaller, less sophisticated refineries are reconsidering expansions."

The expansions come as Congress is debating legislation that some hope would encourage new refining capacity by changing environmental regulations and streamlining the permit process. The House has already passed one version that includes a provision to pay oil companies for delays caused by federal, state, or local authorities or for unforeseen litigation. A Senate bill failed to get out of committee by one vote, but it may get attached to another bill, says a staffer.

The Marathon Oil refinery in Garyville, about an hour north of New Orleans, was the last new refinery built in the US - 29 years ago. Late last month, Marathon said it would spend $2.2 billion to add 180,000 barrels per day - equal to 6 million gallons of gasoline, diesel, and kerosene - to its refining capacity of 245,000 barrels per day.

"When you look at our nation's current refinery capacity and see how hard the refineries are run and then add the outlook for increased petroleum demand, you see that there is clearly a need for additional refining capacity," says Gary Heminger, president of Marathon Petroleum Co. LLC, in an e-mail.

Although Marathon is calling this an expansion, it is the equivalent of building an entirely new refinery. On a tour, Rich Bedell, manager of the refinery, points to a sugar-cane field across the road from the current operation. The new facility will take up 100 of the 320 acres on that side of the road.

"We've got a pretty good buffer zone around us," says Mr. Bedell. "It avoids a lot of the problems other refineries can have."

Indeed, 44 miles south of Marathon is the Meraux refinery, owned by Murphy Oil Co. During hurricane Katrina, a 250,000-barrel storage tank was dislodged, and it lost 1.05 million gallons of oil, according to the Centers for Disease Control and Prevention. The oil mixed with floodwaters to contaminate 1,385 homes in an area of about one square mile.

Some 114 homes were deemed to have a "heavy" concentration of oil - meaning more than 50 percent of the property was covered. Several class-action lawsuits have been filed against Murphy.

In hopes of avoiding problems with their neighbors, the Garyville refinery and a nearby Cargill plant have been steadily increasing the buffer zone around their plants. In 2003, a group of residents who lived adjacent to the facilities hired a lawyer, Joel Waltzer, to begin negotiations over selling their properties to the companies. "I approached [the companies] and said, 'Look, you will be sued every time there is an irregularity. Why don't you expand your green zone and agree to a buyout at terms fair to the community?" says Mr. Waltzer.

Out of 39 properties close to the plant, only six occupied households have decided not to sell.

Buying out residents around refineries is a national trend, says Eric Schaeffer, director of the Environmental Integrity Project. "We're starting to see blank areas, driveways that lead to weed lots," says Mr. Schaeffer, who used to work for the Environmental Protection Agency. "If your situation is that you live right on the fence line, I don't blame anyone for wanting to get a fair price and move."

The Marathon refinery is unusual in terms of its relationship with the local community. The refinery sits on what used to be the San Francisco Plantation, dating back to 1856. Today, the oil company rents out the Steamboat Gothic plantation house for weddings and other events.

Inside the refinery, surrounded by a maze of pipelines, is a cemetery that can still be used - mostly by relatives of slaves whose families have ties to the plantation.

Marathon, like other oil companies, has also been spending money, most recently $300 million, to meet a federal mandate to take additional sulfur out of gasoline. "That's a huge amount of money for no return, no increase in production," says Bedell.

In fact, because refining returns have been low up until recently, the oil companies are cautious about making new investments.

At the moment, Marathon is proceeding with the engineering and design phase. It hopes to get the necessary permits in a year. Then it will make the final decision whether to actually build.