TECHNOLOGY Economic forces push down selling prices of U.S. refineries

Recent data on U.S. refinery sales reveal that selling prices have continued to decline in the 1990s.

Reasons for this decrease include increased plant investments to meet regulatory requirements, excess refining capacity, increased imports of refined products, and reduced margins.

These are the conclusions of Michael J. Remsha, vice-president, corporate valuations, for American Appraisal Associates, Milwaukee. As the world's largest valuation firm, American Appraisal conducts appraisals for 85% of Fortune 500 companies, including Exxon Corp., Mobil Oil Corp., and Shell Oil Co.

In an unpublished report, titled "Factors Affecting Today's Refinery Values," Remsha says government mandates affect refiners in several ways: "The costs associated with mandated reformulation of petroleum products and maximum achievable control technologies, cleanup costs associated with maintaining and shutting down refineries, the costs of rectifying groundwater contamination at existing and closed facilities, and clean air emissions regulations are taking their toll on refiners."

While these expenditures enable a refinery to continue operating, they do not make the refinery more profitable or valuable.

Selling prices

All of these pressures result in what appraisers call "economic obsolescence." Remsha defines the term as: "A reduction in the value of an asset caused by economic forces, rather than a change in the asset itself."

Fig. 1 [30412 bytes] shows U.S. refinery selling prices for the past 10 years. For this purpose, the selling price is measured in $/b/d crude capacity/Nelson complexity index.

The average selling price has declined from about $300/b/d/complexity point in 1988 to $50-75/b/d/complexity point in recent years.

Fig. 2 [31181 bytes] shows selling price as a function of the age of the refinery when it is sold. Clearly, older refineries bring less money.

Remsha says these data indicate that the values of refineries that have not made large capital investments will be low, if not negative. In addition, "Excess capacity remains a problem," says Remsha, "as many undeveloped areas of the world are continuing to add refining capacity to meet domestic demands and to provide export revenue."

Other factors contributing to reduced selling prices of U.S. refineries are:

• Declining local crude production

• Unstable crude costs

• Increased energy conservation

• Growing competition from alternative fuels.

Copyright 1996 Oil & Gas Journal. All Rights Reserved.