PBF PBF Energy Inc

By Tim Puko 

DELAWARE CITY, Del. -- The oil refinery owned by PBF Energy Inc. near this Delaware Bay town was mothballed nearly a decade ago. Today it is running almost full-bore, and PBF and a business partner are spending $100 million to expand it.

The refinery is seeking to capitalize on new international rules that require cleaner-burning fuels on the world's oceangoing ships starting Jan. 1.

U.S. refiners are anticipating a bonanza. The industry estimates it has spent $100 billion on upgrades in the last decade to make cleaner fuels, putting it in a position to boost revenues if the rules raise the demand and prices for the products it makes, as many expect.

The new rules were met with skepticism by the Trump administration and others concerned about the impact on jobs and energy prices. At places like Delaware City, however, the upgrades required to meet the new standards have translated into more good-paying jobs, said James Maravelias, president of the Delaware Building Construction Trades Council.

As car makers and chemical plants have left the region, he said, refiners have become some of his members' most reliable employers.

"Energy is pretty much it for us," said Mr. Maravelias, who is based out of Newark, Del. "There's no other industry that's bringing in those kinds of jobs to Delaware right now."

At refineries, maintenance work -- usually conducted when the refinery is shut down -- often employs 1,200 people at a time, Mr. Maravelias said. And expanding the plant in Delaware City suggests a future full of even more of those tuneups and more work to go around, he added.

A rosy outcome isn't certain for everyone affected -- other sectors, countries and even refiners -- but some analysts and economists are expecting that a boost for refiners will have a wide-ranging positive impact. With record U.S. fuel output leading to more exports and fewer imports, more revenue stays within the country, often reinvested.

Strong investment usually produces more economic growth than does strong consumption, said Kevin Book, managing director of the analysis firm ClearView Energy Partners LLC. So he expects that U.S. refiners would profit and that rising investment would produce a net benefit for the economy even if consumer prices rise.

"More money for U.S. refiners is generally good news," Mr. Book said. "It's awfully hard to argue that in the aggregate this is bad news."

The marine-fuel rules were imposed by the International Maritime Organization, an arm of the United Nations, with the aim of lowering sulfur pollution that can cause respiratory ailments and aggravate heart disease.

A fast way for ships to come into compliance is to switch to using more low-sulfur diesel or similar fuels known as distillates. Many expect that to cause a surge of demand and price increases for those fuels. While that could help the refiners that make them, retail consumers could get hit in the pocketbook because that type of fuel is still widely used as heating oil in parts of the Northeast.

They could face price increases for diesel and distillates of 5% to 20% due to the U.N. rules, analysts estimate. That has raised concerns at the White House about rising energy prices in an election year.

In October, the White House started a push to soften early enforcement of the rules, slowing a rollout over several months. Shares of independent refiners plummeted after The Wall Street Journal reported the effort.

The full implications of the rules weren't well understood, and dire initial economic forecasts caused fear, said Mandy Gunasekara, who was a senior policy adviser at the Environmental Protection Agency until earlier this year. As people learned more, those fears receded and officials better understood how the U.S. might benefit, she added.

"The U.S. is in very good standing because of forward-looking investments by our refiners," said Mrs. Gunasekara, who now runs a strategic-communications business.

White House advisers haven't ruled anything out, but they have stopped actively trying to slow the rollout, according to lobbyists and analysts familiar with the matter. U.S. officials didn't again broach the proposal to delay the rules during IMO committee meetings in London two weeks ago, according to analysts and interest groups that attended or followed the meetings. That was the last round of meetings before the sulfur cap takes effect.

"The United States is not seeking to change the existing IMO 2020 deadline that was certified in October 2016. We are continuing to assess the macroeconomic impacts of implementation to consumers and industry," a senior administration official said.

More-recent economic changes and forecasts have reduced the urgency to intervene. Crude prices are down 23% from a four-year high reached in October.

Crude prices are likely to go lower next year, despite changes from the IMO, the Energy Information Administration has said in recent months. It estimates pressure from the new rules could add about $2.50 to every barrel of international benchmark crude in 2020, but other factors will offset that, causing average prices to fall. Annual diesel and heating oil prices are likely to go up in the U.S. by roughly 6% between 2019 and 2020, but won't be far beyond recent peak prices from the fall of last year, the EIA estimated this month.

It also predicted those changes will lead to broad gains for refiners. The EIA estimated in March that pressure from the marine-fuel rules would help entice U.S. refiners to run at record capacity and near-record utilization in 2020. And the margins they make for diesel fuel are likely to rise 35% from this year.

Singapore, the world's largest maritime refueling port, and several major oil producers have said there would be ample supplies at major ports.

There is still much uncertainty about the impact of the new rules, analysts say. While it seems U.S. refiners will benefit, they have to contend with international competitors who are spending to catch up. That could cause a supply glut that wipes out expected profits. While acute supply fears have eased, some concern lingers. Some observers are worried that extreme shortages could arise, leading to higher costs punishing consumers and slowing other segments of the economy.

At Delaware City the rush is on, with 10-hour days and weekend shifts.

PBF is working with Linde PLC to build a plant that makes hydrogen, an additive PBF needs to make more of the cleaner-burning fuels. Workers spent a recent weekend using 40 trucks of cement to fill a hole 8 feet deep and as big as a football field.

Tiny, shimmering bolts stuck out from the pale gray foundation. The bolts have to be set precisely and can't be off by more than 1/32nd of an inch. They are used to lock in a structure that includes a tangle of pipes nine stories high. The project is scheduled to be completed and operational by next spring, when new demand is likely to start peaking.

"The U.S. refining sector is actually going to ensure the world market is prepared," said Brendan Williams, PBF's in-house lobbyist in Washington. "We hope there's a better understanding of not just the preparedness, but the benefits...that could happen to the U.S. economy."

Write to Tim Puko at Tim.Puko@wsj.com

(END) Dow Jones Newswires

May 26, 2019 05:44 ET (09:44 GMT)

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