US refiners will be able to absorb domestic crude output growth:
study
Washington (Platts)--18Mar2015/218 pm EDT/1818 GMT
A majority of US refiners will be able to increase consumption of
domestic "super light" crude by more than 730,000 b/d combined by 2016,
easily soaking up projected growth in US oil production, industry trade
group American Fuel and Petrochemical Manufacturers said Wednesday.
The findings in an AFPM report are the industry's latest salvo in its
battle to maintain US crude export restrictions, which many refiners say
are needed to stay competitive in the global market by maintaining
access to lower-priced domestic oil. The report is based on an
AFPM-funded survey, with respondents representing 61% of US refining
capacity.
US oil producers have lobbied the Obama administration and Congress hard
to lift the restrictions, warning that production could be shut in if
refiners are unable to handle the growing glut of domestic crude. The
Senate Energy and Natural Resources Committee, chaired by crude export
advocate Lisa Murkowski, Republican-Alaska, will hold a hearing on the
issue Thursday.
The survey results "emphasize that US refiners are not capacity
constrained in the next several years to use the growing super light
production from US tight oil formations," the AFPM said, given $5
billion in improvements planned by 2016 to boost consumption of domestic
crudes by 730,000 b/d.
The US Energy Information Administration in February projected Lower
48 states production growth of 720,000 b/d from 2014 through 2016. The
vast majority of that growth comes from tight formations, such as the
Bakken and Eagle Ford, that have yielded light sweet crudes.
"The survey respondents will achieve their plans to increase use of this
new crude production by continuing to reduce imported light and medium
quality crude oils and by investing to better utilize this domestic
resource," the AFPM added.
The report did not detail what investments the industry plans to raise
its capacity, but said survey respondents expect "new delivery
infrastructure access paths," such as pipelines and crude-by-rail
facilities, to be the biggest contributor to increasing refinery use of
domestic crude, as many tight oil formations are far from refining
centers.
The survey found that if logistics are not an issue and prices of
domestic crudes remain favorable compared with those of foreign crudes,
respondents said they could refine up to 1.5 million b/d more light oil
in 2016 than they processed in 2014, more than twice the 730,000 b/d
increase already planned.
"Inadequate delivery infrastructure has delayed US refinery access to
the new production, but significant changes and expansion in this
infrastructure have and will continue to occur," the AFPM said.
Investments in crude distillation and pre-fractionation equipment would
also be factors, the report said.
LESS EXPENSIVE INVESTMENTS
US refiners have for months insisted that they are nimble enough to
handle any new crudes brought to market, but the survey is the
industry's first formal bid at quantifying that capacity.
Of the AFPM members that responded to the survey, most came from the
Gulf Coast, East Coast and Midwest regions, where much of the new US
crude is being used. In all, 69 refineries were included in the
findings.
John Auers, executive vice president of downstream consulting firm
Turner, Mason & Co., said the survey results are largely in line with
his company's estimates on refining investments, and he noted that
refinery infrastructure to handle light sweet crude is typically less
expensive than new infrastructure to process heavier and sourer crudes.
"Instead of billion-dollar projects to run more heavy crude, these are
more in the $10 [million] to $100 million range," he said. "The types of
things they're building are things like modifying distillation units or,
in some cases, new atmospheric distillation towers."
But US oil producers have cast doubt on the refining industry's ability
to adjust its crude slates. They have cited a "mismatch" between surging
domestic light sweet crude production and a refining sector largely
optimized to process heavier crudes, due to investments made a decade or
more ago, when prospects of US production growth were dim and volumes of
foreign imports appeared to be steadily climbing.
ConocoPhillips CEO Ryan Lance earlier this month said he believes US
refineries will be too burdened by air quality regulations to make the
infrastructure upgrades needed to handle the growing glut of domestic
oil. He estimated that each US refiner would need to spend $400 million
to expand its light sweet crude processing capacity.
"With mercury regulations, with air permitting regulations, there's a
lot that stands in the way of expanding refineries," Lance said after a
March 3 speech at the US Chamber of Commerce. "I'm sure some refineries
will see the economic incentive to make those investments, [but] they're
not going to be able to make the investments fast enough, quick enough
and in the right areas to offset the increases that are coming."
CONGRESS SPLIT
AFPM President Charlie Drevna disputed that assessment, noting that the
US refining industry spends $10 billion annually in capital expenditures
and that any investments to increase light sweet crude capacity would
not be onerous.
"Our refiners are planning for years out on this thing. We look at it in
the bigger picture," he said in a briefing with reporters. "We're going
to be spending money on environmental things, [but] on the other hand,
if you look at what we need to keep the capacity going for the next year
or two, it's not a significant thing. Our guys can handle two things at
once."
Both Lance and Drevna are scheduled to testify at the Senate Energy and
Natural Resources Committee hearing Thursday.
Murkowski has been Congress' leading proponent of lifting the
decades-old restrictions on crude exports, which were instituted in the
wake of the Arab oil embargoes of the 1970s. Some limited exceptions to
the restrictions exist, including some exports to Canada and exports
from Alaska.
Proponents of lifting the restrictions say US oil producers could
benefit from finding new markets and that gasoline prices could fall if
crude exports add to the available oil on the global market.
But removing the restrictions would be politically tricky in
Congress, with many lawmakers not fully convinced that crude exports
would have no negative impact on US gasoline prices.
With West Texas Intermediate currently priced at roughly $9-$10/barrel
below North Sea Brent crude, US producers could make more money by
selling crude, say, in Europe, if such sales were allowed.
Meanwhile, US refiners are benefiting from the deep US crude price
discounts. The US Gulf Coast WTI cracking refining margin closed at
$15.18/b Wednesday, Platts data showed, compared with a Brent cracking
margin of $7.80/b in Northwest Europe.
Drevna said the AFPM is not totally opposed to ending the restrictions,
but that any such move should only be done in concert with ending other
regulations impacting refiners, such as the Jones Act and the Renewable
Fuel Standard. Analysts say the prospects of Congress overturning the
Jones Act are next to nil.
Drevna said his trade group's purpose in conducting the survey was to
correct "misconceptions" among lawmakers and oil producers that the
growing glut of domestic crude would be left untouched by US refiners.
"We should not be the excuse for lifting the oil export ban," Drevna
said. "This study will at least calm the waters when [supporters of
lifting the export restrictions] say what refiners can and cannot do."
--Herman Wang,
herman.wang@platts.com
--Edited by Annie Siebert,
ann.siebert@platts.com
© 2015 Platts, The McGraw-Hill Companies Inc. All rights reserved.
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