‘CRUDE’ Study on U.S. Refining Capacity Built on Bad...
3
Consulting firm Baker & O’Brien (BoB) recently released a report titled, “An Analysis of U.S. Light Tight Oil Absorption Capacity,” which concludes that by 2020, the United States will have capacity to absorb 3.1 – 4.3 million barrels per day (MMB/D) of additional light tight oil (LTO) production versus what was consumed in Q4 2013. This suggests that the recent surge and continued growth in U.S. LTO could all be used domestically, but the study is highly flawed – in both its assumptions and its analysis. Background Much of the increase in U.S. oil production over the last several years comes in the form of light, sweet crude (also called light tight oil), while most U.S. refineries are configured to process heavier crudes. According to IHS Energy, “over $85 billion has been spent in the past quarter century to reconfigure these refineries to process heavy oil imported from countries such as Venezuela, Mexico and Canada. As a result, there are limits to how much of the new, domestically produced light tight oil (LTO) the refining system can efficiently and effectively process.” Domestic producers, therefore, need access to global markets to sell LTO that cannot be refined efficiently in the U.S. The BoB study attempts to downplay and dismiss the mismatch between increasing volumes of LTO and the ability of U.S. refiners to absorb it. But the study lacks analytical rigor and many of its central claims rest on flawed assumptions. 1. The LTO forecast is too low The BoB study assumes that U.S. LTO production will only increase by 0.75 – 1.5 MMBD from 2013 to 2015. However, a number of recent forecasts project volumes significantly greater than the “high cases” considered in the BoB study. The Energy Information Administration’s most recent Short-Term Energy Outlook (September 2014) estimates that U.S. crude oil production will rise from 7.5 MMBD in 2013 to 9.5 MMBD in 2015, an increase of 2 MMBD. Almost all of this incremental production will be LTO. Furthermore, natural gas plant liquids production will increase by 0.5 MMBD, from an average of 2.6 MMBD in 2013 to 3.1 MMBD in 2015. Adding this incremental liquids production together, the United States will produce approximately 2.5 MMBD more in 2015 than in 2013 – a full one million barrels per day more than the high-end estimate in the BoB study. 2. Ignores refinery economics The BoB report clearly states that, “The analysis is focused on technical feasibility. No attempt has been made to assess refinery economics.” Refineries are manufacturing assets that are carefully operated and optimized to maximize economic value. What is “technically feasible” for these facilities does not dictate how they are actually operated. The inescapable fact is that the majority of U.S. refinery capacity is calibrated and optimized to process crude oil slates that include more heavy and medium crude oil, and less LTO. It also ignores the significant crude price discount that would be required for refineries to run in a sub-optimal way in order to utilize lighter crude that they are not configured to run. This price discount would challenge producers’ ability to invest in new supply. www.OilExports.com ‘CRUDE’ Study on U.S. Refining Capacity Built on Bad Data, Flawed Assumptions
Transcript of ‘CRUDE’ Study on U.S. Refining Capacity Built on Bad...
Consulting firm Baker & O’Brien (BoB) recently released a report titled, “An Analysis of U.S. Light Tight Oil Absorption Capacity,” which concludes that by 2020, the United States will have capacity to absorb 3.1 – 4.3 million barrels per day (MMB/D) of additional light tight oil (LTO) production versus what was consumed in Q4 2013. This suggests that the recent surge and continued growth in U.S. LTO could all be used domestically, but the study is highly flawed – in both its assumptions and its analysis.
Background
Much of the increase in U.S. oil production over the last several years comes in the form of light, sweet crude (also called light tight oil), while most U.S. refineries are configured to process heavier crudes. According to IHS Energy, “over $85 billion has been spent in the past quarter century to reconfigure these refineries to process heavy oil imported from countries such as Venezuela, Mexico and Canada. As a result, there are limits to how much of the new, domestically produced light tight oil (LTO) the refining system can efficiently and effectively process.” Domestic producers, therefore, need access to global markets to sell LTO that cannot be refined efficiently in the U.S.
The BoB study attempts to downplay and dismiss the mismatch between increasing volumes of LTO and the ability of U.S. refiners to absorb it. But the study lacks analytical rigor and many of its central claims rest on flawed assumptions.
1. The LTO forecast is too low
The BoB study assumes that U.S. LTO production will only increase by 0.75 – 1.5 MMBD from 2013 to 2015. However, a number of recent forecasts project volumes significantly greater than the “high cases” considered in the BoB study. The Energy Information Administration’s most recent Short-Term Energy Outlook (September 2014) estimates that U.S. crude oil production will rise from 7.5 MMBD in 2013 to 9.5 MMBD in 2015, an increase of 2 MMBD. Almost all of this incremental production will be LTO. Furthermore, natural gas plant liquids production will increase by 0.5 MMBD, from an average of 2.6 MMBD in 2013 to 3.1 MMBD in 2015. Adding this incremental liquids production together, the United States will produce approximately 2.5 MMBD more in 2015 than in 2013 – a full one million barrels per day more than the high-end estimate in the BoB study.
2. Ignores refinery economics
The BoB report clearly states that, “The analysis is focused on technical feasibility. No attempt has been made to assess refinery economics.” Refineries are manufacturing assets that are carefully operated and optimized to maximize economic value. What is “technically feasible” for these facilities does not dictate how they are actually operated. The inescapable fact is that the majority of U.S. refinery capacity is calibrated and optimized to process crude oil slates that include more heavy and medium crude oil, and less LTO. It also ignores the significant crude price discount that would be required for refineries to run in a sub-optimal way in order to utilize lighter crude that they are not configured to run. This price discount would challenge producers’ ability to invest in new supply.
www.OilExports.com
‘CRUDE’ Study on U.S. Refining Capacity Built on Bad Data, Flawed Assumptions
‘CRUDE’ Study on U.S. Refining Capacity Built on Bad Data, Flawed Assumptions
www.OilExports.com
3. Unrealistic estimate of spare U.S. refining capacity
The report uses unutilized capacity in one period of time (Q4 of 2013) as indicative of the available capacity at all U.S. refineries. But Q4 of 2013 was a period of multiple refinery turnarounds, meaning much of this unused capacity is not really spare. For reference, in Q3 2013 refinery runs were 360,000 barrels per day higher than in Q4 2013. During periods of normal refinery operation (i.e., not during turnarounds) there is little to no spare capacity to process additional LTO.
4. Flawed conclusion that LTO could replace all crude oil imports
By making the assumption that “Political, strategic, or other factors will not limit displacement of crude oil imports with addition-al LTO,” the report denies the realities of individual refineries’ business strategy. Joint ventures between medium and heavy crude producers and U.S. refiners are prevalent, and existing contractual arrangements would prevent some refineries from switching crude slates. Certain U.S.-based refineries were specifically built to process heavy to medium crude from Mexico, Venezuela, Saudi Arabia and even California, and no evidence exists to-date that refiners intend, or are eager, to retrofit these facilities to remove that global demand for their resources. (Saudi Arabia owns 50% of Motiva or 1,047 kbd of capacity, Pemex owns 50% of Deer Park which is 327 kbd, Citgo (Venezuela) owns ~750kbd in the U.S.)
5. Ignores U.S. transportation infrastructure constraints
The report does not consider the time and cost of transporting crude oil domestically versus transporting it abroad. Given regulations on marine shipping and rail transportation, as well as various structural bottlenecks that exist, it may not be practical to deliver all LTO to domestic markets. For example, transporting U.S. crude oil from PADD 4 (Rocky Mountains) to PADD 1 (East Coast) is slower and more expensive than sending that LTO to refineries in Canada or Mexico, given existing infrastructure.
6. Overstates domestic refinery expansions
The study does not account for many factors, including costs, which will limit U.S. refineries from handling more LTO. The study wrongly assumes that every announced expansion project will be built, and it also assumes that capacity expansions that haven’t even been announced will nonetheless come online in the near term. Factors limiting capacity expansions include:
The hyper cost-inflation for project sponsors of multiple, simultaneous refinery expansions in the U.S. market.
The opportunity cost of missed revenues due to lost production during downtime required to complete an expansion. The ability to attain refinery expansion permits: new source emissions permits are difficult to obtain. This study assumes all will be granted in all districts without delay or further restriction.
The global market restraints on U.S. petroleum products. The study assumes a bottomless market for U.S. products, but in reality refinery capacity expansions in other countries will provide competition for U.S. LTO products, which may alter the economics of U.S. expansion projects.
‘CRUDE’ Study on U.S. Refining Capacity Built on Bad Data, Flawed Assumptions
7. Ignores U.S. refinery turnarounds
Twice per year, most U.S. refineries shut down or decrease capacity for turnarounds or routine maintenance, and demand for crude oil declines by one to two million barrels per day. The study does not consider these periods of demand loss for U.S. LTO.
Conclusion
U.S. refineries are primarily configured to process heavier, sour grades of crude oil, meaning increases in U.S. LTO produc-tion will require additional markets to be sustainable. Increased US production will go to U.S. refineries where possible, but even with refining expansions projected in the U.S., the projected increase in production means the U.S. market will have a surplus of LTO. Lifting the crude oil export ban would not only provide a market for this additional crude, but it will also ensure that the U.S. can continue increasing its domestic oil production, which will create thousands of new jobs and enhance energy security.
‘CRUDE’ Study on U.S. Refining Capacity Built on Bad Data, Flawed Assumptions
www.OilExports.com
