Inside Tucson Business: Arizona closest for nation's next refinery

Arizona closest for nation's next refinery

Published on Monday, September 26, 2005

Inside Tucson Business report

It took one of the nation's worst natural disasters to do it but momentum is growing to build new refineries in the United States after a 29-year hiatus.

Hurricane Katrina exposed just how stretched the nation's refineries are, when 20 percent of the country's oil-refining capacity was shut down in a single day. The excercise was similarly repeated again just last week in the face of an oncoming Hurricane Rita.

Now industry and Congress are looking at how to boost capacity.

Of all the proposals coming forward in the wake of Katrina and now Rita, the furthest along is Arizona Clean Fuels Yuma, which aims to locate a high-tech oil refinery in the western Arizona desert. The hurdles are high. The company is still lining up investors to pay the $2.5 billion price tag. It has to hire biologists to ensure the new plant will not hurt an endangered lizard. A local clean-air group is questioning the project. But if the plan is realized, it would be the first U.S. refinery built since 1976.

"Maybe Katrina has taught us not to concentrate all refineries in one area, let alone a hurricane-prone region," says Glenn McGinnis, the company's CEO. "We need to diversify."

McGinnis' company wants to build the refinery on 3,000-acres of mostly former citrus grove along side Interstate 8 near Tacna. The refinery itself would take up about half the land with the remainder left as a buffer.

Among the challenges still facing the group is cutting a deal to access crude oil through a lengthy pipeline from the Gulf of California through northwestern Mexico. The deal requires approvals from leaders including Mexico's Congress, minister of Finance and minister of Energy.

Even though Arizona Clean Fuels may be ahead of the game, getting the refinery up and running isn't going to be a quick fix. Once all the agreements are made and permits are issued, construction is expected to take three to four years.

But once completed, the refinery would be able to add 150,000 barrels per day (b.p.d.) to the nation's supply.

The current refinery squeeze has been building for years. For the past two decades, deregulation and low profits have combined to push the industry into consolidation. Partly because of environmental regulations, it was cheaper to expand existing refineries than to build new ones. According to the Department of Energy, in 1981 the United States had 324 refineries with a total capacity of 18.6 million b.p.d. Today, there are just 132 oil refineries with a capacity of 16.8 million b.p.d., according to Oil and Gas Journal, a trade publication.

This bottleneck is expected to keep pressure on gas prices - and on politicians. Both political parties are weighing measures to loosen environmental and permitting constraints for refineries. Rep. John Shadegg, R-Arizona, is set to offer a bill to streamline federal regulations governing refineries, Congressional Daily reports.

Congress got an earful from industry officials who argued for tax breaks to bolster capacity and complained that environmental regulations and "not in my backyard" citizen movements had blocked efforts to build new refineries.

But refineries also have a long history as being environmentally undesirable.

"There's an unprecedented push to build new refineries," says Denny Larson of the Refinery Reform Campaign, an environmental group that has documented refinery emissions violations in San Francisco. "We expect there well could be a wholesale change in clean-air laws that regulate refineries thanks to Katrina."

Still, many in Congress are pushing refinery construction. One possibility would be to revive proposals cut from the recent energy bill - such as President Bush's plan to convert old military bases into refineries, says John Lichtblau, chairman of the Petroleum Industry Research Foundation, a public-policy think tank. Earlier this month, members of the House Energy and Commerce Committee discussed the touchy subject of handing most siting authority over to the federal government.

Environmentalists remain wary.

"With today's technology, a new refinery could be really clean - far cleaner than today's refineries - in theory," says Eric Schaeffer, director of the Environmental Integrity Project, a New York-based watchdog. He fears, however, that industry lobbyists would win looser regulations rather than applying all that good but costly technology.

In Yuma, McGinnis says his plant's best-of-class pollution technology would make it a good neighbor and keep environmental costs down. "When this refinery is finally built, it will be the cleanest in North America," he says.

Material from reporter Mark Clayton of The Christian Science Monitor is included in this report.