Insufficient profits put refineries in jeopardy, report finds

One or both of Hawaii’s two oil refineries are likely to close by 2020 as their already thin profit margins are squeezed further by a shift to renewable energy sources, tougher environmental standards and other factors, members of a state task force warned.

The recent sale of Tesoro’s Kapolei refinery to Par Petroleum Corp. does not change the basic premise that Hawaii is becoming an increasingly difficult environment in which to operate an oil refining business, according to an interim task force report prepared for the state Department of Business Economic Development and Tourism.

"One or both of Hawaii’s refineries may not be able to withstand the threats to their profitability before 2020 and will need to close," the report said. "The urgency for Hawaii to fully understand and prepare for the potential refinery closures cannot be overstated."

Both refineries have faced economic pressures from having to buy expensive crude oil, high operating costs and increasing regulatory impacts on the refining business, according to the report.

"At some point declining demand for power generation and transportation fuels stemming from conservation efforts and the Hawaii Clean Energy Initiative will exacerbate the problem," the report said. The HCEI mandates that 40 percent of Hawaii’s energy come from renewable sources by 2030.

Gov. Neil Abercrombie formed the 29-member task force in February after Texas-based Tesoro announced it planned to close its Kapolei refinery because it could not find a buyer. The task force initially was focused on immediate consequences of the refinery’s pending closure. After Tesoro announced in June that Par Petroleum would buy the refinery, the scope of the task force was shifted to the longer-term challenges to sustainability of both refineries.

A final task force report is scheduled to be completed by the end of the 2014 legislative session.

Members of the task force noted in the report that in recent years Chevron also had considered closing its Hawaii refinery because it was not performing as well as the company’s refineries elsewhere. The report also cited several other studies that highlighted the competitive weakness of Hawaii’s refineries.

"Simply put, the two refineries are small, required to process expensive sweet (low-sulfur) crude oil, and are configured to meet Hawaii’s unusual product demands in comparison to the United States as a whole" according to the report.

Officials from Par Petroleum have said they were aware of the challenges to operating a refinery in Hawaii when they negotiated the deal with Tesoro. Par Petroleum plans to boost profitability by slowly increasing the refinery output to 85,000 barrels a day from 70,000 barrels a day, tapping cheaper sources of crude and finding new markets to export excess refined products it makes, Par executive Bill Haywood said in a Sept. 25 interview with the Hono­lulu Star-Advertiser.

The report also said that Hawaii’s two refineries could be adversely affected by pending Environmental Protection Agency regulations that will set stricter standards for gasoline and fuel oil. The new standard, which will drive up refining costs, could start taking effect as early as 2016 or 2017, according to the report.

Farther down the road, plans to bring large quantities of liquified natural gas to Hawaii for power generation would reduce demand for fuel oil that the local refineries supply to Hawaiian Electric Co. and the Kauai Island Utility Cooperative, according to the report.