Los Angeles refiners weigh natural gas curtailments

OREANDA-NEWS. June 20, 2016. Los Angeles refiners could face natural gas curtailments that force changes to crude slates and product choices as the region grapples with a loss of natural gas capacity.

Concern over the uncertain supply of the key feedstock for both electricity and refinery processes already rattled the Los Angeles products market today. Los Angeles Carbob prices marked their highest increases of the week today as some traders concerned about power outages took long positions ahead of a heatwave expected to begin next week. Cash differentials on the prompt rose by 4?/USG while July volumes rose 4.5?/USG.

The industry must work closer with natural gas suppliers but may have few options as years of environmental upgrades leave facilities ill-suited to adopt alternate fuels during a lengthy outage of the basin's largest single natural gas reservoir. SoCal Gas' Aliso Canyon storage site has been offline for months following a massive leak.

"The reality is the gas system will be operating this summer in ways that it's never operated before, and we don't quite know what that means," California Public Utilities Commission (CPUC) chairman Robert Weisenmiller said today during a workshop on the issue.

Slow progress restoring operations at Aliso Canyon following the leak at the facility which was plugged in February means partial service won't resume in August as originally planned. A four-month gas leak from a damaged well released 86 Bcf (2.4bn m?) and drew state restrictions on the facility's use.

US independent refiner Tesoro warned regulators in March that disruptions in natural gas supply "can and has led to reductions in fuel production."

Natural gas supply continues to flow into the region, but without the massive storage facility users have less flexibility to adjust deliveries each day. A weather-related surprise increase in power demand or heating needs could lead to curtailments of gas deliveries to refineries, power plants and ancillary refining businesses.

Refiners use natural gas to keep emissions low while processing heavy crude and producing clean products. The industry accounted for roughly 16pc of natural gas demand in the SoCal Gas last summer. While refineries are low on the list of companies that could see natural gas curtailments during peak demand, the companies that provide them with hydrogen and other support services are not.

Refiners could run at minimum rates if curtailments were communicated at least a week in advance, depending on their configurations, Phillips 66 Wilmington operations manager Jolie Rhinehart said at the workshop. But it was difficult to guess how long refiners could sustain such operations.

"Refinery operation is truly variable, depending on how you're running that day, what the crude is that you're running, what the product mix is that you want, what tankage that you have available," Rhinehart said. "Because significant curtailments, it just doesn't work for refineries."

Curtailments to electricity generators are another concern, since sudden power loss can devastate refineries by unexpectedly cutting workers' control of dangerous processes. Even a brief waiver can knock units offline.

Los Angeles gasoline's premium to the Nymex benchmark surged higher by 4?/USG in early June on outages at Chevron's 275,000 b/d refinery in El Segundo and in the Carson side of Tesoro's 363,500 b/d complex. Both facilities generate their own power and steam critical to the refining process while supplying electricity to the local grid, when operating normally. But both can also have the supply of natural gas they need both for power and refining operations curtailed if there are shortfalls in the basin.

State agencies in April estimated that without access to Aliso Canyon, seasonal pipeline outages and unplanned problems at other facilities could cause 16 days of power disruptions this summer. The report did not contemplate the specific pressures added by winter heating demand, but said "there should be no doubt that winter reliability will be threatened" if Aliso could not resume injections before that season.

One of those days could come as early as next week. The Los Angeles region expects triple-digit temperatures Monday and Tuesday, straining power demand for home cooling. The pinch comes as Carbob stockpiles languished near ten-year lows last week, according to California Energy Commission data.