New Refinery Cancelled

Shell today announced it will no longer design and build a new refinery that was to be sited in Ontario, Canada near its existing refinery in Sarnia.

The company stated that uncertainty as to the product market, and escalating construction costs figured heavily in their decision not to proceed.

Recent decreases in demand for gasoline, diesel, and jet fuel, compared to year-ago demand, may have had an impact. In the United States, the weekly petroleum inventory report from Energy Information Agency, EIA, shows a significant decline in petroleum demand for the past several weeks. This is largely due to the unprecedented high prices for petroleum products. Product demand has declined by approximately two percent, when in previous years the demand has increased by one to two percent.

It remains to be seen if this is a temporary drop in demand, or if U.S. consumers have changed their habits for the long term. Domestic factors that support a decrease in petroleum demand include poor sales of gas-guzzling vehicles such as SUVs and pickups, robust sales of small cars and especially hybrid vehicles, and an increase in ridership on mass transit systems. Also, U.S. airlines are cutting their fleets and grounding airplanes. The sale of subsidized ethanol may also contribute to the decrease in petroleum product demand. Certainly, the recent increase in the CAFE standards to 35 miles per gallon by 2020 will decrease demand.

Contrary factors that will increase demand include the ever-growing population, sprawling suburbs that increase commuting distances, and an increasing economy, although it is increasing slowly at this time.

Beyond the U.S. borders, other factors are at work. First, sales of the Tata Motors car in India are reported to be brisk. This will increase global demand for refined products. Second, a very large refinery is being commissioned in India near Mombai, owned by Reliance Industries. At 580,000 barrels per day, it is one of the largest refineries in the world. It is due on-line in September 2008. The Reliance Industries refinery will export products initially, until domestic demand in India absorbs the output.

It is likely that the end of the U.S. summer driving season, and the export of petroleum products from India will combine to reduce gasoline prices.

Mr. Sowell is an attorney who represents refining companies and other operating companies in the process industries. Mr. Sowell holds a B.S. in chemical engineering and worked for more than 20 years in refineries and other process plants world-wide. His website is www.resowell-law.com.