Didn't Connacher increase the asphalt storage and production at the refinery? The refinery must be making money if this is true.

What's driving the asphalt shortage

Todd Mellema

Monday, July 21, 2008

A Rocky Mountain News story by Julie Poppen (“Drivers face bumpy ride — Blame it on asphalt,” July 15) about asphalt shortages left out a very important fact. The statement, “Refineries aren’t generating as much of the liquid used for asphalt mix because they are focusing on more profitable products, such as diesel fuel,” is not entirely true.

Yes, refineries are making more profitable products, but asphalt is in short supply not because the refiners are greedy, but because Congress during the Clinton administration passed legislation mandating Ultra Low Sulfur Fuels (ULSF) for gasoline and diesel.

The process used to manufacture ULSF is commonly known as a coker. The coker has been around a long time but was not in widespread use until the feds mandated ULSF. This mandate forced every U.S. and most foreign fuel producers (who wish to sell in the U.S.) to update their facilities to meet the mandate. When the rule went into effect in 2007, only a handful of U.S. refineries could meet the criteria; therefore, they had to import the fuels from abroad (mostly from Europe, which already had a ULSF mandate) to meet demand.

Now here’s the asphalt kicker: Asphalt is manufactured in a solvent-extraction process known as a de-asphalting unit (DA). A DA unit is fed with a heavy byproduct, called vac-bottoms, from an upstream unit called the vacuum still. A coker requires vac-bottoms as a raw material, therefore the DA unit must compete with the coker for the raw material. With summer demand for fuels, asphalt production suffers because a coker does not produce asphalt.

The coker is a very efficient process, and even though it does not produce asphalt, it will produce more high-value products per barrel of crude than a DA unit. Therefore, from a refiner’s perspective, why make asphalt? If the asphalt industry wants to buy asphalt, it will have to be willing to pay the raw-material price.

Case in point is Cenex Harvest States refinery in Laurel, Mont. When its coker came online in 2006, it quit making a specialty grade asphalt altogether because its coker made up for lost revenue.

So, you think, just make more vac-bottoms. Can’t. The Environmental Protection Agency prohibits an increase of production capacity without due process (the EPA’s way of saying “tie you up in court until you give up”).

Another case in point is Suncor in Commerce City. When Suncor’s coker came online last spring, it not only cost $600 million to construct, it took 90,000 barrels per day of vac-bottoms out of asphalt production. (Wow, $600 million. And you wonder why fuel is now more expensive. You really think they’re just going to eat this expense mandated by Congress?).

This is only the beginning. Frontier refining in Cheyenne is constructing a coker that will come online later this year. More are planned.

Polymer also is a big issue. World demand is increasing exponentially, and with the EPA making it so difficult to operate here in the U.S., these companies are going to stay overseas.

My business manufactures and sells asphalt pavement maintenance materials and equipment. Due to this asphalt shortage, we are on allocation for asphalt. I have orders pending to supply product to Colorado Department of Transportation and cannot fulfill them. In addition, several municipalities and counties have had to scale back their road-maintenance programs dramatically. We still are selling the same dollar volume, but we’re just delivering half the product, which results in only half the road-maintenance projects getting done.

As for private paving contractors, they’re really crying the blues. I’ve had some here lately just shut down because they couldn’t sell services at the high price necessary to complete the work. Currently, most of our business is municipal or state, and they have only limited revenue to get the work done.

This is only the beginning. You always have to remember that this issue is part of the “energy issue” everyone is talking about. It’s not just about gasoline! Only 21 percent of a barrel of crude is gas. The other 79 percent is everything you take for granted, from car tires to sunglass lenses.

Yes, gasoline and diesel have increased 40 percent in the past 18 months, but industrial products such as asphalt and such have increased 300 percent in the past 18 months.

Todd Mellema is president DISSCO Denver Industrial Sales & Service Co.