After more than a century of churning out fuel on the banks of the Houston Ship Channel, the city’s oldest refinery is preparing to shut down, potentially putting hundreds of people out of work. Its competitors are welcoming its demise.

The closure of the plant — built by industrialist Harry Sinclair in 1918 and now owned by petrochemicals giant LyondellBasell Industries NV — reflects the struggles of a sector that’s declining along with demand for its central product.

Gasoline consumption in the U.S. peaked five years ago, according to federal data, and the transition to cleaner energy is eroding demand for other fuels, too. That’s turned the refining industry into a Darwinian battleground in which only the fittest survive.

Lyondell has faced stiff competition. When the Sinclair refinery began operating a century ago, the plant was little more than a cluster of pipestills on a swampy watershed, and the Houston Ship Channel had just opened as a deepsea port.

Now, the refinery is part of a massive petrochemical corridor and is one of 10 fuelmakers in Houston, many of which are modernized megaplants that have been retooled to process light oil from the Permian Basin. To stay viable, Lyondell would have had to sink significant capital – as much as $2 billion, according to RBN Energy Refined Fuels Analytics division – into improving the aging plant. After trying and failing to sell the refinery, the company in 2022 announced it would cease operations.

It’s not alone. Phillips 66 plans this year to close its Wilmington, California, refinery after shutting a hurricane-damaged Louisiana plant in 2021, and several other refineries are vulnerable. That’s on top of nearly 1 million barrels a day of refining capacity that shuttered after pandemic lockdowns decimated gasoline demand.

But the string of closures belie the reality of today’s market: Refining profits actually aren’t that bad. By one measure, they’re about 20% higher than the 10-year average. And in the aftermath of the pandemic, when oil prices tanked but fuel demand was resurging, those profits soared to record-high levels.

That post-pandemic jump in refining margins even prompted Lyondell to keep the Houston refinery running for more than two years following its closure announcement. That’s about as long as they could safety operate without investing in costly maintenance and upgrades.

Put simply, refineries don’t shut down because their margins are bad. They do so because the can’t justify the cost of upkeep.

“If I was looking at a several hundred million-dollar capital expense that I would want to pay off over five or 10 or 20 years, that is where I might start considering the pressure that declining demand will put on margins,” said Austin Lin, principal analyst refining and products North America at Wood Mackenzie.

Still, now that margins have settled back to pre-pandemic levels, fuelmakers facing a tepid demand outlook are anxious to keep them from falling further.

Ultimately, Lyondell’s closure “is a good thing for the market,” said Randy Hurburun, senior refinery analyst at London consultancy Energy Aspects.

Had the shutdown occurred a few years ago, it might have roiled markets, spiked prices and pushed competitors to quickly ramp up production to make up the shortfall.

Instead, the market’s treating the closure as “a pebble in a fairly big lake, not a boulder in a small lake,” said John Auers, managing director of RBN Energy’s Refined Fuels Analytics division.

The plant’s workforce reflects the industry’s shifting dynamics. Its staff has dwindled to around 450 from 1,200 a few years ago and most of those workers were hired after the closure announcement triggered a wave of departures. Only 125 of the plant’s current staff predate the shutdown decision and just 80 will stay on once operations cease, said Marcos Velez, assistant director of United Steel Workers District 13,

(Lyondell has said it will try to place many workers in jobs at its chemical plants.)

Market impacts

The biggest impact to energy markets may be to fuel exports. Because the refinery is shutting at a time when many plants halt production for seasonal maintenance, supplies of gasoline and diesel will be tighter than usual. To keep the domestic market in balance when demand picks up in the spring, exports will have drop as much as 11%, said Paul Y. Cheng, an analyst with Scotiabank.

LyondellBasell on average produces 140,000 barrels a day of gasoline and 100,000 barrels of diesel, while the U.S. exports about 1.9 million barrels a day of the fuels combined.

The refinery’s competitors will probably benefit from the closure right away. Gulf Coast and Midwestern plants that import heavy oil will see the price of that crude decline as demand for it wanes, according to Auers. The slack in the market could also mitigate price spikes from potential U.S. tariffs on Canadian and Mexican oil.

Looming shutdowns

More closures are probably on the horizon. Smaller, older refineries without access to a variety of crudes or export markets for their products are increasingly vulnerable compared to mega plants like Motiva Enterprises’ Port Arthur, Exxon Mobil Corp’s Beaumont and Marathon Petroleum Corp’s Galveston Bay refineries – three plants that together comprise 10% of U.S. fuel production.

New regulations on refineries in California could spur retirements there, too. The largest U.S. refiner by capacity, Valero Energy Corp, last year warned that “all options are on the table” for its California plants and — echoing the slow demise of LyondellBasell’s Houston refinery — said it had stopped investing in those West Coast assets beyond what’s necessary to keep them running.

Refineries reach a “natural decision point” when the cost of continuing to run outweighs expected future profits, said TD Cowen analyst Jason Gabelman.

Refineries unwilling or unable to absorb the cost to modernize, simply find themselves unable to stay competitive, said Auers. The rest get to enjoy “fairly attractive and sustainable refining margins.”

(With assistance from Lucia Kassai.)

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