1998 Annual Report
Contents || Corporate ListingsSignificant Events in Our 1998 Journey
Frontier Refining had a great year in 1998 -- the best since being acquired by Frontier Oil Corporation in 1991 and this followed last year's record setting performance. The refined product spread averaged $6.09 per sales bbl in 1998 compared to $5.78 in 1997. Our net operating margin before depreciation averaged $2.75 per sales bbl for the year versus $2.48 last year. The improvement over last year was due primarily to a higher light/heavy crude oil spread, continued good by-product margins due to lower crude oil prices and excellent product demand in our primary marketplace along the Front Range of the Rocky Mountains.
Product Markets. Refined product demand in our region continued to be strong during 1998. Our major markets Ð Colorado, where three-fourths of our gasoline is marketed, and Wyoming, where more than half of our diesel is sold -- have experienced a growth rate over the last six years far superior to the national average -- twice the national growth rate for gasoline and four times the national average for diesel. Gasoline and diesel crack spreads, although good, were not as strong as in 1997. While our market held up better than most, the lower crack spreads were a national trend as refineries produced product in excess of demand. Asphalt margin was a major contributor to profitability last year. With lower crude prices and stable asphalt prices, sales of asphalt were up over 1997 due to an active construction market. While Frontier continues to be a wholesaler of its products, in 1997 Frontier became a branded representative for CITGO, entering into a seven-year marketing agreement. This affiliation allows Frontier to protect market share by offering the CITGO brand to its independent retailers who seek relationships with branded suppliers.
Crude Oil Supply. A significant factor in our success in 1998 was due to a $.61 per bbl widening of the light/heavy spread over 1997. Our 41,000 bbl per day Frontier Refinery has a significant advantage over less complex refineries serving our market because of its ability to use heavy crude oil, which generally has a substantially lower cost. This primarily is due to our coking unit which provides significant upgrading capacity. The precipitous drop in crude oil prices during 1998, however, caused the reduction of heavy crude oil production both regionally and in Canada, and resulted in wells being shut-in as the economics for heavy crude oil production turned unfavorable for many producers. This resulted in the narrowing of the light/heavy spread, especially in the second half of the year. While the Company had already contracted (in late 1997) for over 80% of estimated heavy crude requirements for 1998 at spreads of approximately $4.80 per bbl, some of those barrels were shut-in by the third quarter and the spread had narrowed substantially. For the year, the light/heavy crude oil spread averaged $4.15. By late 1998, the Com-pany had contracted for approximately 14,000 bpd or approximately 50% of its estimated heavy crude requirements for 1999 at spreads of approximately $1.50 to $2.00 per bbl less than the average spread in 1998. Because of the higher cost of heavy crude oil, the length of the 1999 contracts was shortened and ranges mainly from three to six months. A meaningful increase in the price of crude oil should bring more heavy crude back into production and the spread should widen again.
Net operating margin before depreciation averaged $2.75 per sales bbl for the year.
The crude oil the Refinery relies most on is Wyoming General Sour, but Canadian supplies of heavy crude have become more available over the last few years. Frontier Refinery has direct pipe-line access to Canadian production via the 172,000 bpd Express Pipeline. The Company believes that the Express Pipeline has reduced its transportation costs for Canadian crude oils by approximately $.75 per bbl and has reduced its transportation time by approximately 30 days to 15 days. In 1998, the Company bought approximately 31% of its crude oil from Canadian producers.
| Major Product Pipelines |
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The refined product spread averaged $6.09 per sales bbl in 1998.
Operations and Capital Expenditures. The Refinery continues to run exceptionally well. Total refinery charge, which includes light crude oil, heavy crude oil and other feed and blend stocks averaged 40,386 bpd in 1998 versus 41,283 bpd in 1997. Gasoline yields averaged 15,738 bpd (or 40% of the product mix) versus 17,060 bpd in 1997 and diesel yields averaged 13,097 bpd (or 34% of the product mix) compared to 12,856 bpd in 1997. Charges and yields were down from 1997 due to the major turnaround completed in the second quarter of 1998. During 1998, the Company ran heavy crude barrels totaling approximately 94% of its crude oil charge, or 32,303 bbls per day versus 91% or 31,967 bbl per day in 1997. Refining operating expenses of $3.34 per bbl were $.04 per bbl higher than last year due to higher natural gas usage, increased chemical usage and increased transportation costs for asphalt and other product sales, and lower throughput caused by the turnaround.
 PADD IV Refineries
1 Frontier (41 mbpd)2 Sinclair (54 mbpd) 3 Sinclair (Little America) (22 mbpd) 4 Conoco (58 mbpd) |
5 UDS (28mbpd) 6 Chevron (45 mbpd) 7 Amoco (52 mbpd) 8 Phillips (25 mbpd) 9 Big West (Flying J) (25 mbpd) 10 Inland Resources (13 mbpd) |
11 Wyoming Refining (12mbpd) 12 Conoco (49 mbpd) 13 Exxon (48 mbpd) 14 Cenex (41mbpd) 15 Montana Refining (Holly) (7mbpd) |
| Rocky Mountain Refineries and Major Crude Oil Pipelines |
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In 1998, the light/heavy spread widened by $.61 per bbl over 1997.
In the second quarter of 1998, the Refinery completed its most comprehensive turnaround ever and it occurred over a four week period. The total cost of the project was approximately $15 million of which approximately $8 million were capital expenditures. Every process unit was down at some point with the fluid catalytic cracking unit and alkylation unit receiving the most attention. The work performed should continue to improve the efficiency and reliability of the Refinery.
Also completed in 1998 was the conversion program Frontier Refinery started in 1993 to the latest state-of-the-art computer control systems for all refinery process units. The crude unit was the first process unit placed on the Honeywell TDC 3000 System which utilizes advanced computer controls to optimize the unit's operations. Other process units have been placed on the system since, and by 1996 all control systems, except the coker, had been brought into a new centralized control room. In 1998, the coker was the final process unit to be placed on the TDC system.
In total, the Refinery had $16.8 million of capital expenditures in 1998 which compares to $5.7 million last year. In addition to the extensive turnaround in the second quarter and the TDC system coker conversion, Frontier completed several smaller "return on investment" projects. The return on investment is high and the payback time is short on these and will make the plant even more profitable in the future. For 1999, planned capital expenditures should be approximately $9.0 million including the March turnaround scheduled on the crude unit.
