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Marathon Petroleum ( MPC ), HF Sinclair ( DINO ), Delek say could pivot to alternative crudes

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Tariffs on Canada, Mexico would boost feedstock cost, squeeze refiner margins further

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Majority of US refinery capacity slated to run cheaper heavy Canadian, Mexican crude

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Analysts see inland refiners sticking with current heavy crude diet

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Switch to lighter crude raises challenge of converting refining units

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Refinery output could drop due to cost or limited heavy crude supplies

By Nicole Jao

NEW YORK, Feb 20 (Reuters) - Top U.S. refiners are poised to seek alternative sources

for heavy, sour crudes, including running more domestic grades, as they await clarity around

U.S. President Donald Trump's threatened tariffs on imports from the nation's top crude

suppliers Canada and Mexico, executives said.

Running more domestic crude, which is predominantly light, sweet shale oil, through U.S.

refineries could be a win for Trump, who has vowed to boost the nation's energy production and

championed the fossil fuel industry.

The tariffs, however, have generated concern among refiners, who are already watching

profits slide from record highs in 2022 on softer demand, as they would now take a hit from

higher feedstock costs. More than 70% of U.S. processing capacity is configured to run heavier

grades, which are cheaper to import from Canada and Mexico.

Trump, who took office on January 20, plans to charge a 25% tariff on Mexican crude and a

10% levy on Canadian crude beginning in March, a delay from his original plan. Canada, the

biggest oil supplier to the U.S., exports some 4 million barrels per day (bpd) of crude into the

U.S., 70% of which is processed by Mid-Continent refiners.

Marathon Petroleum ( MPC ), the top U.S. refiner by volume, said its refineries in the

Mid-Continent region could switch from processing heavy sour crude to other grades.

"We could look to pivot to alternative crudes because of our logistics capabilities," Rick

Hessling, chief commercial officer at Marathon Petroleum ( MPC ), told investors during the company's

fourth-quarter earnings call this month.

Hessling added that domestic crude from the Bakken shale formation in North Dakota and the

Rocky Mountains could be among their options.

Ohio-based Marathon operates 13 refineries in the U.S., six of which are located in the

Midwest. Its 253,000-bpd refinery in Robinson, Illinois, processes large amounts of heavy crude

from Canada.

The refiner warned that costs could rise if Trump's tariff plans go through, but the burden

would primarily be borne by Canadian oil producers and, to a lesser extent, U.S. consumers.

"We're working with the administration and we're working with agencies, as well as the trade

associations, to be sure that the right people understand the implications of these decisions,"

Marathon CEO Maryann Mannen said.

Texas-based HF Sinclair ( DINO ), which operates seven complex refineries, could process

more light sweet crude.

"What we believe in our refineries is we have the ability to lighten up," Steve Ledbetter,

executive vice president of commercial at HF Sinclair ( DINO ), said during the company's

earnings call on Thursday. Its refining system is connected to the key crude oil delivery hub in

Cushing, Oklahoma, Ledbetter added.

Its 94,000-bpd oil refinery located in Sinclair, Wyoming, and 135,000-bpd refinery in El

Dorado, Kansas, need to run a certain amount of heavy crude, he said. "But we can minimize what

that is and introduce a lighter slate."

Independent refiner Delek, which operates four inland refineries, could run more

light, sweet crude if it is economic to do so, its CEO Avigal Soreg said earlier this month.

"We have knobs to open," he said, emphasizing that the company would do whatever was most

economic.

However, converting units to process lighter crudes economically would require refiners to

invest in new equipment. Lighter crude tends to produce higher volumes of petrochemical

feedstock naphtha and less of the more profitable diesel and jet fuel, which could also force

some operators to reduce the amount of crude they run overall.

"If you're configured to run heavy sour crude in the Midwest, your other options,

broadly, are not going to be as desirable, as economic," said Jason Gabelman, analyst at TD

Cowen.

TD analysts expect U.S. refiners that run Canadian crude on the margin to switch to

light sweet crude, thereby increasing the prices of U.S. benchmark West Texas Intermediate crude

futures (WTI) and global benchmark Brent crude. Both benchmarks are light sweet grades.

Inland refiners that run Canadian crude as a core part of their diet would likely stick

with their current crude slate, the analysts said.

Phillips 66, HF Sinclair ( DINO ) and Par Pacific Holdings ( PARR ) have elevated exposure to

Canadian crude, data from TD Cowen shows.

Besides the lower transportation costs due to proximity, the price of a barrel of

Canadian oil is still far cheaper for Midwest refiners than a comparative local grade produced

in the Gulf of Mexico.

A barrel of Western Canada Select (WCS) heavy crude in Hardisty, Alberta, was reported

to trade last at about $13 under WTI, compared with Mars Sour , a U.S. medium

sour crude produced along the U.S. Gulf of Mexico, at about a $2 premium to WTI.

BRACING FOR IMPACT

Ahead of the impending tariffs, U.S. imports of Canadian crude

hit record highs

in January.

Valero Energy ( VLO ), the second largest U.S. refiner, anticipates a reduction in refining

throughput if heavy crude feedstocks become limited, executives said during the company's

earnings call last month.

"A lot depends on how far it goes and how deep you have to back off on some of those heavy

barrels," said Greg Bram, vice president of refining services.

The San Antonio-based refiner's 360,000-bpd Port Arthur refinery in Texas processes Mexican

heavy sour crude oil into gasoline, diesel and jet fuel.

"The Mid-Con needs Canadian oil to maintain throughput," said PBF Energy ( PBF ) CEO Matthew

Lucey. "Anytime that there's going to be disruption of that size, if it happens, it will have

some impact on throughput."

Houston-based Phillips 66 said the tariffs may divert Canadian oil away from the U.S. at

first, while the 457,000 bpd of Mexican crude that comes into the U.S. could move to Europe or

Asia instead.

"Without having really any clarity on what's going to happen, there is no way we can really

speculate on how we deal with it. We're just going to have to deal with it when it comes up,"

said Valero's Chief Operating Officer Gary Simmons.