Royal Dutch Shell PLC plans to nearly double the size of an oil refinery it operates with a Saudi partner in Port Arthur on the Texas Gulf Coast, making it the biggest in the US and one of the largest in the world.
Shell, one of the world's largest oil companies, said on Friday its decision to expand the refinery would increase US supplies of gasoline, diesel and jet fuel.
Shell plans to boost the Port Arthur refinery's capacity to 600,000 barrels of crude oil per day by 2010 from the current 275,000 barrels per day.
Shell estimated that the expansion, the biggest in more than 30 years, would cost about US$7 billion.
The Anglo-Dutch company operates the refinery with Saudi Refining Inc, a subsidiary of Saudi national oil company Saudi Aramco, in a venture called Motiva Enterprises LLC.
Major oil companies have canceled plans to build new refineries or greatly expand current ones for many years because of environmental opposition and because the profit margins on refining crude oil were too thin.
The Shell-Saudi expansion will occur at an existing plant, however, making it easier to obtain the necessary permits. Workers have already begun sinking pilings into the soil where major units will be built.
And refining margins have rebounded since 2002. Shell is betting that they will remain strong along with high prices for crude oil, analysts said.
"If they didn't think the future is going to be better than the past, it makes no sense," said Fadel Gheit, an oil industry analyst with Oppenheimer & Co. "The outlook must have improved. This is meaningful and needed."
Gheit said, however, that Shell's move is unlikely to push other oil companies to greatly expand their US refineries. He said steady but small increases -- "capacity creep," as oil executives call it -- and more use of ethanol could satisfy US gasoline demand, especially if fuel-mileage standards are toughened.
A government advisory panel led by retired Exxon Mobil Corp chief executive Lee Raymond reported recently that while global demand for oil could grow sharply, US oil consumption could fall by 3 million to 5 million barrels a day if vehicle fuel-efficiency standards are doubled by 2030.
The companies, however, expect demand for gasoline to continue growing -- even with oil surging past US$80 per barrel.
"Demand for the product is growing in the US, and actually demand exceeds the current refining capacity by quite a bit, up to the point where we have to import about a million barrels a day," said Rob Routs, Royal Dutch Shell's executive director of refining.
The expansion at the Port Arthur refinery would add about 1.7 percent to US capacity, according to government figures.
The Shell-Saudi Refining venture has been considering a major expansion at Port Arthur for some time, and it grew more serious within the past year.
Shell had not previously publicly put a cost estimate on the project, although there were widely reported estimates from local officials that the project would run about US$4 billion.
Routs acknowledged that labor and material costs along the Gulf had increased but said the project remained very attractive.
Shell estimated the project will create 4,500 construction jobs and 300 production jobs. It has substantial local support.
"We're feeling wanted," Routs said.
At 600,000 barrels per day capacity, the Shell-Saudi Refining project would be larger than Exxon Mobil's nearby Baytown plant, which is now the largest US refinery at 562,500 barrels per day.
The last new refinery in the US was Marathon Oil Corp's plant in Garyville, Louisiana, which opened in 1976.
Houston-based Marathon recently announced a US$3.2 billion project to raise capacity to 425,000 barrels per day, an increase of 180,000 barrels per day.
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