April 2014

First oil

Let’s all be refiners

Pramod Kulkarni / World Oil


“I don’t think the industry has done a very good job of clearly and concisely stating the case for crude oil exports.”—Ernest Moniz, U.S. Secretary of Energy.

A U.S. Energy Secretary should be embarrassed to make such an accusation. The case for U.S. crude oil exports is simple and straightforward. It is the duty of the energy secretary to understand the basic facts about the industry he serves. Since homework does not appear to be Mr. Moniz’s strong suit, I will be pleased to state the basic facts.

Free trade. Freedom is the bedrock of the U.S. Constitution, and it follows that free trade should be the cornerstone of American commerce. The U.S. government needs to do all it can to ensure a free marketplace.

The ban against U.S. crude oil exports was imposed through the 1975 Energy Policy and Conservation Act. The thinking at that time was that, since the U.S. was importing as much as 60% of its crude oil requirements, and domestic production was declining, it didn’t make sense to open up export markets and incur a possible increase in the gasoline prices at retail pumps.

With the tremendous production of shale oil, there is a drastic transformation of the U.S. crude oil supply-demand scenario. U.S. crude oil imports dropped to 7.5 MMbpd by February 2014, the lowest since the 1990s.

Crude slate exchange. Shale oil (API 42°) is lighter than crude oil from conventional sandstone reservoirs, such as Nigerian Qua Iboe (API 36°) with much lower sulfur content. As such, shale oil from the Bakken and Eagle Ford should sell at a premium to both WTI and Brent crude. However, much of the U.S. Gulf Coast refineries are configured to process heavy crude oils from Mexico and Venezuela.

Thus far, the U.S. has reduced the import of light oils to a trickle, in favor of what the downstream industry likes to call light tight oils (LTOs) sourced from the shale plays. But the U.S. will continue to import heavy oils, even when there’s an oversupply of LTOs. There are two reasons for this situation.

First, the Lyondell CITGO refinery will continue to import heavy crudes from Venezuela. Similarly, the Shell Motiva refinery will continue to import Saudi Arabian crudes because of contractual obligations. The Shell Deer Park refinery is dedicated to refining Mayan crude and exporting refined products back to Mexico. Under this scenario, it makes sense to export U.S. LTOs in exchange for the heavy crudes from Saudi Arabia, Mexico, Venezuela and Canada.

Secondly, the U.S. refiners need to invest in equipment for more efficient use of LTOs. While LTOs are lighter, they do have contaminants, such as paraffins (wax) and asphaltenes. Refiners are blending LTOs with heavy crudes as the feedstock. At this time, most refiners are able to blend up to 55% of LTOs before the heat exchangers start fouling. If the status quo continues, the U.S. refining industry won’t be able to accept increasing shale production by 2022.

LTO differential. Because there is no outlet for the shale oil producers, LTOs are selling within the U.S. at a discount of as much as $12/bbl. If the crude oil export ban is lifted, it is not an issue for the vertically integrated oil companies, because what they lose at the refinery end, they will make up at the upstream production end. However, independent refiners, such as Valero and Tesoro, are reluctant to give up the discount, because they don’t have upstream operations.

Producers become refiners. If the export ban is not lifted, it makes sense for upstream and midstream operators to get into the refinery business and keep the cost advantage to themselves. Some of this transition is already taking place, because it is relatively easy to install splitters to extract NGLs, which can be exported, and build low-technology “tea pot” refineries to produce diesel, which can be sold locally.

The Obama administration may continue to obstruct free trade, but our industry will find a way out. Does it make sense now, Secretary Moniz? wo-box_blue.gif 

About the Authors
Pramod Kulkarni
World Oil
Pramod Kulkarni pramod.kulkarni@worldoil.com
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