A push to build new US refineries

Hurricane damage highlights fall in capacity and boosts gas prices.

It took one of the nation's worst natural disasters to do it. But momentum is growing to build new refineries in the United States after a 29-year hiatus.

By shutting down 20 percent of the country's oil- refining capacity in a single day - and boosting prices nationwide by more than 45 cents a gallon on average in a week - hurricane Katrina has exposed just how stretched the nation's refineries are. Now industry and Congress are looking at how to boost capacity.

"The call to establish more refineries is likely to be sounded again," writes Jason Schenker, an economist with Wachovia Securities in a recent analysis of Katrina's impact.

"We need to specifically address our nation's lack of refining capacity and finally do something about it," said Rep. John Sullivan (R) of Oklahoma in a statement last week. "Hurricane Katrina has further underscored the fact that our refining capacity is inadequate."

But building more refineries will involve trade-offs, critics warn.

"There's an unprecedented push to build new refineries," says Denny Larson of the Refinery Reform Campaign, an environmental group that has documented refinery emissions violations in San Francisco. "We expect there well could be a wholesale change in clean-air laws that regulate refineries thanks to Katrina."

The current refinery squeeze has been building for years. For the past two decades, deregulation and low profits have combined to push the industry into consolidation. Partly because of environmental regulations, it was cheaper to expand existing refineries than to build new ones. In 1981, the US had 324 refineries with a total capacity of 18.6 million barrels per day, the Department of Energy reports. Today, there are just 132 oil refineries with a capacity of 16.8 million b.p.d., according to Oil and Gas Journal, a trade publication.

This bottleneck is expected to keep pressure on gas prices - and politicians. Both parties are weighing measures to loosen environmental and permitting constraints for refineries. Rep. John Shadegg (R) of Arizona is set to offer a bill to streamline federal regulations governing refineries, Congressional Daily reports.

Echoing that call, Representative Sullivan announced he will introduce legislation to help pave the way for a big new refinery near Cushing, Okla. His proposal, which had been stripped from the energy bill passed by Congress this summer, would speed up permitting by lessening "arcane and outdated environmental standards," he said in his statement.

But the furthest along is Arizona Clean Fuels Yuma, which aims to locate a high-tech oil refinery in the Arizona desert. The hurdles are high. The company is still lining up investors to pay the $2.5 billion price tag. It has to hire biologists to ensure the new plant will not hurt an endangered lizard. A local clean-air group is questioning the project. But if the plan is realized, it would be the first US refinery built since 1976.

"Maybe Katrina has taught us not to concentrate all refineries in one area, let alone a hurricane-prone region," says Glenn McGinnis, the company's CEO. "We need to diversify."

Congress got an earful from industry officials who argued for tax breaks to bolster capacity and complained that environmental regulations and "not in my backyard" citizen movements had blocked efforts to build new refineries.

Refineries have long been seen as undesirable. From 1999 to 2004, Chalmette Refining LLC, a partnership between ExxonMobil and Venezuela's state oil company, violated clean-air laws 34 times due to "upset" emissions that occur when normal plant operations falter, according to a judge's finding in February.

Still, many in Congress are pushing refinery construction. One possibility would be to revive proposals cut from the recent energy bill - such as President Bush's plan to convert old military bases into refineries, says John Lichtblau, chairman of the Petroleum Industry Research Foundation, a public- policy think tank. Earlier this month, members of the House Energy and Commerce Committee discussed the touchy subject of handing most siting authority over to the federal government.

Environmentalists remain wary. "With today's technology, a new refinery could be really clean - far cleaner than today's refineries - in theory," says Eric Schaeffer, director of the Environmental Integrity Project, a New York-based watchdog. He fears, however, that industry lobbyists would win looser regulations rather than applying all that good but costly technology.

Back in Yuma, Mr. McGinnis says his plant's best-of-class pollution technology would make it a good neighbor and keep environmental costs down. "When this refinery is finally built, it will be the cleanest in North America," he says.

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