Economics Slow Big Oil Projects -- Whither Hyperion?

A Monday NYTimes article notes that the precipitous drop in oil prices has put the brakes on numerous Big Oil projects. Domestic demand may be part of the picture, too: in a trend that began before this year's $4-per-gallon price spike and which appears to be continuing even as gasoline prices drop, Americans (even rural Americans!) are putting fewer miles on their cars. Throw in the fact that credit's tight, and you get lots of Big Oil developers saying, "Wait a minute":

• StatoilHydro, Shell, Nexen, and Petro-Canada have all backed off expansions in Alberta's tar sands, where some producers need oil at $90 a barrel to make money.
• Saudi Arabia and Kuwait have nixed new refinery projects.
• Oil companies aren't punching as many holes in North Dakota's Bakken Shale.
• Callon Petroleum has suspended a deepwater drilling project in the Gulf of Mexico.
• Raymond James says domestic drilling production could drop 41% next year [Jad Mouawad, "Big Oil Projects Put in Jeopardy by Fall in Prices," New York Times, 2008.12.15.]

So much for "Drill, baby, drill!"

What does Big Oil's curbing of enthusiasm for expansion mean for the two big petro-projects in South Dakota, the TransCanada Keystone pipelines and the Hyperion refinery in Union County?

TransCanada appears to be toodling along fine. A few rainy days (literally and economically) aren't delaying the overall Keystone schedule. TransCanada issued $1.16 billion in stock options last week and got $150 million more than that in offers to buy. Everybody loves infrastructure, says TransCanada CEO Hal Kvisle. Of course, TransCanada just inked a deal with Alaska to have the state cover $500 million in federal licensing costs for a big natural gas pipeline... this while competing companies are spending $600 million of their own money to advance a similar project.

We can expect TransCanada, an established player with shovels in the ground, to weather the storm. But what about dreamy-eyed Hyperion? They've never built a refinery, and this article in Sunday's Sioux City Journal suggests they never will:

Leading industry analysts such as Tom Kloza, chief oil analyst for the Oil Price Information Service, remain skeptical. Kloza said he doesn't believe a new facility will be built any time in the foreseeable future because no one will finance a new facility right now and the expansion of existing refineries will meet the domestic demand for oil products.

"There's no question that a year from now we will be refining probably more gasoline and more products in the United States than we would probably be comfortable with domestically," Kloza said. "The chances of that refinery (Hyperion) being built right now are somewhere between slim and none" [Meagan Sexton, "New Refineries Face Challenging Environment," Sioux City Journal, 2008.12.14].

This isn't some hippie talking. Sexton also cites a U.S. Energy Information Administration analyst saying that expansions of existing refineries will domestic needs for the next 20 to 25 years, thanks to increased efficiency (that would include inflating your tires) and renewable fuels.

Expanding existing refineries also is more cost-effective:

Cindy Schild, refining issues manager for the American Petroleum Institute, said she believes new refineries face challenges simply because it is more cost effective to modify existing refineries than to build a new one.

"You already have the facility, infrastructure and community support," Schild said. " You have the means to get the product in and out, which makes it more cost effective. On a per-barrel basis, it is more cost effective to expand than to build a new facility [Sexton].

So even if we buy Hyperion's assertion that they can ride out the current credit crunch and line up financing to start belching filth into our clean air and water by 2014, we have three sensible analysts saying we don't need it!

It won't be us tree-huggin', land-lovin' enviro-whackos who will keep Hyperion out of Union County (though I'll keep waving that banner... pass the granola!). It will be a gal in a suit and glasses who comes up from Accounting with her Blackberry and says to Al Huddleston and Preston Phillips, "Guys, the refinery's not a money-maker."