In the past two years, Valero has significantly expanded it ability to process heavy, sour crude, by acquiring a 315,000-barrel-a-day refinery in Aruba and a 185,000-barrel-a-day refinery in Louisiana. The company also completed in late 2003 the expansion of its heavy, sour processing capacity at a refinery in Texas by 45,000 barrels per day.
Fadel Gheit, senior oil analyst at Oppenheimer & Co in New York, said the decision in recent years by Valero and others to expand their heavy, sour refining capacity has proven to be "brilliant."
While the spread between sweet in sour is likely to narrow, "going forward, the differential is still going to be much higher than it was in the past," Gheit said.
Premcor, a small independent refiner based in Old Greenwich, Connecticut, is also betting its future on the profit potential inherent in lower-quality crudes. In November, for example, Premcor announced that it was pursuing a 50-50 joint venture with Canadian oil producer EnCana Corp, whereby Premcor's refinery in Lima, Ohio, would be modified to process about 200,000 barrels a day of heavy oil supplied by EnCana.
In a similar move, Canada's Suncor Energy is spending US$300 million to upgrade a refinery it owns in Denver, where it intends to process increasing volumes of heavy crude produced from its oil sands operations.
Refining analyst Aaron Brady at Cambridge Energy Research Associates said these types of deals could become more common as Canada and other nations ramp up production of heavy, sour crudes.
"That stuff is all looking for a home," he said.
But as more "homes," or refineries, are built to handle sour crude, the profit margins will dwindle, said Cal Hodge, a former Valero executive who runs a Houston-based consultancy specializing in clean fuel issues.
"Just watch for history to repeat itself," Hodge said.
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