POSTED: 01:30 a.m. HST, Jan 28, 2013
Asian jet fuel shipments to Hawaii are poised to triple as Tesoro Corp. shuts the state's biggest crude processing plant, helping lift refining margins from the weakest level in close to five years.
As many as three jet-kerosene cargoes, or about 600,000 barrels, may be shipped monthly to Hawaii from Asia in the second quarter, compared with an average of one a month last year, according to a Bloomberg News survey of six traders and refiners. Jet fuel was at its most expensive level relative to diesel in two months on Tuesday in Singapore, encouraging refiners to produce more.
Tesoro has announced that it plans to shut its 94,000 barrel-a-day Kapolei refinery in April and convert it into a storage terminal. That will leave Chevron Corp.'s neighboring 54,000 barrel-a-day plant as the only refinery in the state. That offers an opportunity for Asian processors from GS Caltex Corp. to Formosa Petrochemical Corp. to boost exports, while threatening to push up costs for carriers just as international air travel is showing signs of picking up.
Asia is the most likely source of any additional imports because of legislation that restricts shipments from the U.S. mainland, according to Al Chee, Chevron spokesman for the Hawaii refinery. The Merchant Marine Act of 1920, known as the Jones Act, requires products transported from one U.S. port to another to be carried by vessels flagged and built in the country.
The law "adds a lot of costs" to fuel brought from the U.S. West Coast, Chee said. "It's a fair amount of cents per barrel, so it's probably not a surprise that imports are generally coming from foreign sources, and generally from Asia."
Hawaii is already supplied by Asian jet fuel because the market, even with both refineries running, is short, according to Dave Hackett, president of Stillwater Associates, an independent oil consultant in Irvine, Calif. "That lost Tesoro volume will also be imported mostly from Asia," he said. "This is going to boost prices."
Jet fuel cost 90 cents a barrel more than diesel Tuesday, the biggest premium since Nov. 26. The difference, known as the regrade, is used by refiners to determine whether to maximize jet fuel production in place of diesel. It fell to a $1.05 discount Dec. 4, matching the largest gap since June 2008. The premium was at 75 cents last week.
Jet-kerosene cargoes in Singapore, Asia's oil-trading hub, have risen 1.5 percent to $128.75 a barrel since Jan. 7, the day before Tesoro said it would shut its refinery, according to data from PVM Oil Associates Ltd., a London-based broker. The premium of the airline fuel to diesel has jumped fivefold from 15 cents, the data show.
Asia provided all of Hawaii's 2.54 million barrels of jet fuel imports in the first 10 months of last year, according to the U.S. Energy Department. About 75 percent came from South Korea, with the rest shipped by Malaysia and Taiwan. Hawaii's total jet fuel consumption was 10.9 million barrels in 2011.
Chevron's plant doesn't have the capacity to make up for the volumes lost when Tesoro's units close, Chee said. The facility produces about 30 percent gasoline, 25 percent low-sulfur fuel oil, 20 percent jet fuel and 12 percent diesel.
"The market will be short jet fuel, and someone will have to import," Chee said. "Exactly how much in additional imports is needed for this market is what we're trying to understand."
Hawaiian Airlines already gets most of its supply from Asia, spokesman Keoni Wagner said. Alaska Air, which does about one-fifth of its flying to Hawaii, isn't seeing an immediate price increase because of the planned shutdown, said Bobbie Egan, a spokeswoman for the Seattle-based company.
Tesoro's Kapolei plant may be too small to change the price outlook significantly, according to SK Innovation Co., which runs South Korea's biggest refinery.
"It's too early to tell whether there's any impact on fuel prices," said Megan McCarthy, a spokeswoman for United Continental Holdings Inc., the carrier with the most flights to Hawaii.