Development Strategy 



From the standpoint of the major oil companies and independent 

 refinery companies, who own refineries, the most critical factor affecting 

 the establishment of a "grass roots" refinery is the massive capital 

 investment involved. At a cost of $1,500 to $3,000 per barrel -per-day 

 capacity, depending on location and complexity [26], a new 200,000 

 barrel -per-day refinery can cost from $300 to $600 million. Such quantities 

 of money represent large investments even to the larger oil companies. 

 Money for a new refinery can be generated from company profits or by 

 selling stocks and bonds. 



The second most important factor affecting the decision to construct 

 a new refinery is the considerable length of time before an investment 

 in a refinery can begin to earn a return. This is especially critical 

 when oil markets become unstable, for approximately four years are 

 required to construct a refinery. If during this four year period the 

 market changes significantly, the refinery can end up being a poor 

 investment. 



If construction of a new refinery were necessary, the petroleum 

 company would attempt to find a site within the existing industry infra- 

 structure or within an area that already was being developed by the 

 petroleum industry. The company would employ this strategy in order to 

 minimize time spent in obtaining necessary dredge-and-fill zoning, and 

 other permits. 



Sufficient instabilities and changes have occurred in petroleum 

 markets in the last few years to indicate that there nay be reluc- 

 tance to invest in new domestic refineries. The most important 

 instabilities, though, have been introduced by fluctuating interest 

 rates and inflation. If both shoot upward in the midst of construction, 

 the cost of completing a refinery can jump by tens of millions of dollars. 

 These instabilities cast long shadows on the security of investing in 

 hundred-million-dollar refineries and may herald a slowdown in new 

 refinery construction. 



Oil refineries are built in response to growing demand. There is, 

 of course, some attrition of refining capacity as refineries get obsolete 

 or inefficient; but the attrition rate is low, so new refinery construction 

 is justified almost entirely on the basis of growth in demand. 



If demand for products is growing slowly, it is usually more feasible 

 to add refining capacity than to construct a major new refinery. First, 

 a smaller investment is required, and its payback is faster. Secondly, 

 the addition of a large increment of refining capacity in a region may 

 either cause marketing problems for additional output or require the 

 shutdown of older, yet functional, refineries. 



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