Gulf Coast refiners warily expanding

PORT ARTHUR, Texas — Stark reminders of the damage wrought by last year's hurricanes emerge while entering this Gulf Coast refinery town about 110 miles east of Houston.

Trees and utility poles are bowed. Blue tarps still cover wrecked homes. Business signs that flew away nearly a year ago still haven't been replaced.

Even with these humbling reminders of hurricanes Rita and Katrina — which last year temporarily shut down 28 percent of the nation's refining capacity and pushed pump prices well past $3 a gallon — the oil industry is busy expanding along the Gulf Coast.

Refiners expect to boost capacity by 2010 by as much as 1.9 million barrels, about 11 percent of the current rate, with the most significant changes along the Gulf Coast.

For example, the 3,600-acre Motiva refinery here is planning an expansion that the facility's general manager says will double its production by 2010 and make it the largest U.S. refinery.

"You could ask, 'Aren't you increasing the risk if you're going to be sticking it in the Gulf Coast area?' During two months out of the year, probably," Todd Monette said. "When you start looking at core infrastructure needed to put a big site like this in place, that's what the Gulf Coast is all about."

Despite such confidence, last year's storms did lead to fundamental changes that could delay or put some expansion plans out of reach. The labor pool is tight. Orders for materials and parts take longer to fill. Competition from other industry or hurricane-related projects put a drag on resources. Each contributes to increased costs.

San Antonio-based Valero Energy Corp., the nation's largest independent refiner, is close to completing a 75,000-barrel-per-day capacity expansion in Port Arthur. But labor and material problems have delayed a September completion by two months.

Richard Marcogliese, Valero's executive vice president of operations, said project costs have already gone up 20 percent. Material orders that typically take 18 months now take closer to 36, he said.

"The implication for the industry is that in this environment, projects are more expensive, so you have to ask, 'Are they all going to get built?"' Marcogliese said.

The hurricane-related impact reaches outside the Gulf region as well. Last month San Antonio-based refiner Tesoro Corp. canceled a 25,000-barrel-per-day expansion at its Anacortes, Wash., plant.