Darkness into Light - Domestic Light Oil Processing in the USGC: Have We Hit the Limit?

Refineries along the U.S. Gulf Coast (USGC), which account for half of the country’s total refining capacity, are generally among the most sophisticated and complex anywhere, with configurations that enable them to break down heavy, sour crude oil into high-value, low-sulfur refined products. However, over the past eight years, the USGC has been flooded with increasing volumes of light, sweet crudes produced in the Eagle Ford, the Permian and other U.S. shale plays as new pipelines were constructed or reversed to the coast for domestic refining or export. Still more pipelines will be coming online over the next year. Today, we evaluate how much domestic crude oil has been absorbed into the USGC refining system, the implications to the overall crude slate qualities, and options for increasing domestic crude oil processing in the near term.

In September 2018, the Energy Information Administration (EIA) reported that the U.S. (black line in Figure 1) surpassed Russia (red line) to become the world’s largest producer of crude oil; Saudi Arabia (orange line) is now in third place. Shale production, particularly from the Permian Basin, is leading the charge, and transporting this light, sweet crude oil from West Texas to the Gulf Coast has created a flurry of logistics projects for midstream companies. The hefty spread between West Texas Intermediate (WTI) and Brent (about $9/bbl at the time of writing) illustrates that the pipelines pointed towards the USGC, home of over half of the U.S. refining capacity and export terminals, have been filled. However, the new transport infrastructure being planned and built to relieve that constraint will eventually open the floodgates to the coast again, providing options for coastal refineries to increase domestic input or for the crude oil to be exported.

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