Hess to close last refinery in New Jersey

This story went mostly under the radar, but it will have some implications for many people on the east coast and for the industry in general further down the line. Without much fanfare, Hess recently announced that they were selling off their last commercial refinery, located in New Jersey. Their stated reasons are clear enough, but there’s a bit more to the story.

Hess Corp.’s Port Reading, N.J., refinery—the company’s first and last such facility—will close its doors at the end of next month as the company gets out of the refining business to focus on more-profitable exploration and production activity.

The company also said it is seeking to sell its U.S. terminal network. Chairman and Chief Executive John Hess said the moves “will complete (the company’s) transformation from an integrated oil-and-gas company to one that is predominantly an exploration-and-production company and be able to redeploy substantial additional capital to fund its future growth opportunities.”

Industry analysts agree that in the current market, the profitability of refineries has declined in comparison to exploration and recovery. This is in contrast to some reports – as recently as last October – which were projecting some light on the horizon for this aspect of the industry.

The refinery business has long been the difficult stepchild of the oil industry, expensive to run, prone to accidents and a low-margin headache for executives who preferred drilling for gushers.

But signs of the improving fortunes for the industry can be seen at Valero Energy’s Three Rivers refinery here, about 70 miles south of San Antonio at the doorstep of a giant new shale oil field.

Why the discrepancy, and why should we care? The first question deals with the above reference to shale oil and other new resources. There hasn’t been a new refinery built in the United States for more than 30 years, but a few of them have undergone massive upgrades to allow them to handle shale oil and the complex hybrids coming from bitumen exploration in Canada and some spots in the American west. It’s an expensive process, but when completed they are able to tap into a new breed of raw materials and come back to profitability. East coast refineries are too far away from those lines to make it productive to upgrade, so they’ve stuck with the business of processing sweet crude from the middle east. Unfortunately, that business is on the decline just as the newer resources mentioned above are ascendent.

Unfortunately for consumers in the Northeast in particular, this means supply lines for meeting their winter energy needs are extended and the prices go up. Gas in New York has already climbed back up above $3.50 per gallon and is projected to continue to rise through the spring.

So why haven’t more of the western refineries followed suit and upgraded? It’s an expensive process in the extreme and it requires the confidence that there will be enough supply to keep them operating at capacity well into the future before they make it.

At the BP refinery in Whiting, Ind., a major Midwest hub, BP is nearing completion of a $4 billion expansion project expected to be completed in 2013. That project includes a new coker, crude distillation unit, a gas oil hydrotreater, and modernization of its wastewater treatment and sulfur recovery facilities.

All those changes are needed in preparation for handling the new fuel hybrids. Now ask yourself one question. If you had to spend four billion dollars to upgrade one refinery, and there was continued talk in the media every day about extended delays – if not outright cancellation – of the Keystone XL pipeline, combined with new regulations by the hundreds which add expenses to even begin the process, would you spend it? Or would you keep that money on the sideline until there were either new policies in place or new policy makers which boosted your confidence that you would have enough crude coming in to keep your plant humming?

Math is hard.