Cheap and abundant crude continues to prove a boon to the Alon’s Big Spring Refinery, the chief supplier of gasoline to the Odessa and Midland market, that now considers expanding.
Gasoline prices are expected to drop in the coming months.
But those low gas prices are more a result of refinery output levels throughout the country rather than because of Permian Basin oil production or prices.
Instead, the Permian Basin’s status as an oil giant could mean long-term changes at the Big Spring refinery and potential changes for consumers that could mean an age of lower gas prices, said Jeff Brorman, Alon’s vice president of refining in Big Spring.
“We think once the price goes back up, they will start drilling more, and so there is plenty of crude here,” Brorman said. “We are advantaged from a refinery standpoint because we are close to the crude, and we’ve got a pretty good market here with how things are growing locally. The demand has definitely picked up with all the oilfield work and the population growth.”
Company officials see a promising future for the Permian Basin’s oil and gas industry that suffers through oil prices almost half of where they were at this time last year. Since the refinery relies entirely on Permian Basin crude, that means Alon also has faith on an abundant supply of its feedstock for years to come.
In the meantime, however, Alon officials see major developments despite the downturn.
One is a study underway by Alon to expand the refinery in Big Spring that has been steadily producing more gasoline to a level today of about 73,000 daily barrels. The second development is a move by another refiner, Delek, to buy Alon’s United States refineries. Delek bought 48 percent of the Alon’s shares earlier this year.
And both developments carry the potential to usher in cheaper prices at the pump for residents of Odessa and Midland, according to independent observers of the refining industry.
Brorman said the expansion studies are in the early stages and that it is too early to say how much gasoline production could increase. So there are no plans to immediately expand the refinery’s roughly 200 employees, even though Brorman said they have seen more and higher quality applicants as oil and gas activity slowed.
But results of the study should come in about six months, Brorman said.
West Texans at the pump do not always see the fruits of the Big Spring Refinery’s competitive advantage, because gasoline is priced against competition funneling in their gasoline from other refineries in the Gulf.
But the idea, is that expanding the refinery to allow it to pump more Permian Basin-sourced gasoline back to the Odessa and Midland area would increase pressure on competitors to lower costs at the pump, Brorman said.
“Locally, on the gasoline side a lot of times we are pushing out as much production as we can sell locally, just because of the size of the terminals and the pipelines,” Brorman said.
The refinery could also continue expanding gasoline sales in Arizona, where the company targets profitable markets in Tucson and Phoenix.
The Big Spring Refinery stands out among refiners because of its access to cheap Permian Basin crude, said Tom Kloza, head of the analytical team at GasBuddy.com. And that advantage holds true even when oil prices are higher, because the refinery benefits from its proximity to the region and cheaper transportation costs.
“It makes sense to expand in areas where you have access to cheap crude, and Big Spring is clearly one of those,” Kloza said. “I’m sure it’s going to come to dollars and how much money it costs and permits and so forth, but, if I were look at refineries across the country and say here is one that makes sense, being close to the Permian basin, that’s just a real real motivation.”
The motivation for the Delek acquisition stems mainly from the strength of Alon’s refineries in Texas and Louisiana, according to company statements and outside analyses by Morgan Stanley’s Evan Calio and Manav Gupta, who issued a report last month that said Delek’s management “appears focused” on acquiring the remaining shares of Alon USA.
Doing so would make Delek “one of the biggest crude buyers in the Midland market,” the Morgan Stanley researchers found, and that “higher purchasing power and better inventory management are key elements of the deal.”
During the oil boom, discounts between regional and national oil prices meant a windfall for the Big Spring (and a headache for oil companies). But those discounts, driven by difficulty getting surging crude supplies to market, largely disappeared after the build-out of new pipeline infrastructure, Brorman said.
Those glut-driven discounts reached as high a range as $20 in recent years. But since the downturn and the new infrastructure, Brorman said the refinery sees a spread of less than a dollar, impacting those short-term profit margins.
“They are still close to the crude oil but they are not going to get the discounts they were getting in 2013, 2012,” Kloza said. “They aren’t going to see those anymore.”
Yet the refinery benefits from another phenomenon: increased roadwork driven by state projects. The Big Spring Refinery manufactures asphalt made from the heavy leftovers of the refining process. In a May conference call with investors, Alon CEO Paul Eisman said that “especially West Texas, we see very strong demand for asphalt.”
“That is one of the things about Texas is that they’ve done a good job at the state level finding ways to fund some of the road repairs that we’ve not seen in other parts of the country,” Eisman said. “And so, we expect very, very strong demand for asphalt in our region and expect to have good year out of Big Spring.”
Eisman reported some difficulties during the first quarter, including weak wholesale margins on Permian Basin crude because of regional prices. The weather also hampered crude supply to the refinery, he said.
But the outlook Eisman offered for the rest of the year was brighter.
The Energy Information Administration expects prices to drop nationally through the rest of the year to an average of $2.43 per gallon in the second half of the year, in part because of high oil production in areas such as the Permian Basin.
Today, average gas prices in Odessa are about $2.59 per gallon, less than the national average and the statewide average of $2.61.
“Gas prices are going to be pretty tempered,” Kloza said. “Because crude prices are going to be pretty tempered.”
Contact Corey Paul on Twitter @OAcrude on Facebook at OA Corey Paul or call 432-333-7768.
This article was written by Corey Paul from Odessa American, Texas and was legally licensed through the NewsCred publisher network.