Refineries responding to rising diesel needs

David Hendricks

Shareholders applaud whenever Valero Energy Corp. gives presentations on its strategy. Its customers, mainly automobile drivers, might sit in confused silence. That's because Valero wants to make more diesel, not gasoline. More refiners should do so, and some are, including those based in San Antonio.

The biggest profits are in diesel right now. Gasoline profits have shrunk because demand is steady to flat while inventories remain high. The record cost of crude oil drives up the cost of gasoline, diesel and other fuels. Because of rising diesel demand, prices for it have increased faster than those for gasoline. Higher prices boost the cost of operating trucks, farm equipment and military vehicles. On Monday, diesel prices averaged $4.33 a gallon nationally, up 18 cents from the week before. Diesel averaged about $2.40 in early 2007. To capitalize on diesel's larger profit potential, at least three of San Antonio's public companies are increasing diesel production or have plans to do so. That qualifies San Antonio as a key diesel center. Valero plans to spend $3.8 billion through 2011 to increase diesel production at two of its 17 refineries, the ones in Port Arthur and St. Charles, La. The investment will yield an additional 103,000 barrels per day of ultra-low sulfur diesel. The increase will be on top of the 872,000 barrels per day of non-gasoline products, called distillates, it already makes. Distillates include diesel, jet fuel and heating fuel oil, but most of Valero's distillates are diesel. "Increasing diesel production is a â¿¿lay-up,'" Tom Kloza, chief oil analyst for Maryland-based Oil Price Information Service, said in an e-mail. "It is the highest-growth product globally, and I believe it will sell at a premium to gasoline into the next decade." Adding gasoline production actually would be riskier for refiners such as Valero, Kloza said. The reason: Ethanol is adding market share at the expense of gasoline. "By the end of 2008, ethanol will represent just under 10 percent of the gasoline formulations east of the Mississippi," Kloza said. Diesel also is a growing U.S. export. The information is not reliable, but it appears that U.S. shipments of diesel to South America, Europe and some parts of Asia are higher than what the United States imports. Another San Antonio company that may jump into the diesel market in a bigger way is NuStar Energy LP. NuStar is considering adding more than $300 million in diesel-making equipment at one of two U.S. asphalt refineries it acquired recently from Venezuela. It's making the diesel investment in the one on the Delaware River. New diesel production there could start in 2011. Tesoro Corp. is switching some gasoline production to diesel without making any large equipment investments. Executives at San Antonio-based Tesoro declined to say how much more diesel is being produced, but the Los Angeles refinery already has shifted production to make 7,000 to 9,000 additional barrels of distillates, including diesel, per day. Everyone wants gasoline prices to fall, but stable supplies of diesel are vital to every economy. Increases in inventories of diesel can reduce fuel costs, which steadies the expense of harvesting crops and delivering food and merchandise to stores. "The world needs more diesel," Valero spokesman Bill Day said. "So does the United States." Drivers may want lower gasoline prices, but lower prices for goods at retail and grocery stores are the next best thing. Gasoline prices remain high because of spiraling oil prices, not because of a shortage. Valero is adding diesel production because it will help Valero's bottom line. It also just happens to help the U.S. economy. dhendricks@express-news.net