US tight oil production from shale has surged over the past three years pushing overall domestic output up by more than 60 percent since 2011. Over that same period the quality of US crude production has gotten considerably lighter. An EIA report out last week showed that the percentage of crude production with higher than 40 degrees API of gravity (very light crude) has almost doubled between 2011 and the end of 2015. The increasingly light crude slate is challenging US refining capacity and driving the push for reform of crude export regulations. Yet the data available to inform this critical industry debate is confusing and inadequate. Today we discuss the analysis challenge.
The drumbeat of interest currently surrounding crude oil exports in Washington DC has initiated increased analysis around the topic. One study, prompted by congressional request and published at the end of May 2014 by the Energy Information Administration (EIA) delves into the quality of current US crude production (you can download a copy of the report here). The EIA is investigating this topic because of concerns that surging US crude production – up over 60 percent in the past 3 years - is increasingly lighter in quality whereas much of the available refining capacity is geared towards processing heavier crudes. This quality mismatch is adding pressure to a wider debate about whether the US should repeal decades old laws restricting the export of US crude.
Prior to this EIA study – itself only the first stage in a wider enquiry into crude quality – the agency placed little focus on the quality of US domestic production – concentrating instead on reporting the gravity and sulfur content (two key criteria that the industry uses to measure crude quality) of imported oil. That concern with imports dates back to a time when declining US production meant that understanding where US crude imports came from and the possible political implications of the latter was a big deal. Now US production is regaining levels not seen since the late 1980’s and heading to record volumes in the next four years, (11 MMb/d by 2019 is the latest RBN estimate – see Like A Bat Out of Hell), so concerns about supply are fading. Today the question is one of demand – how is all the new light domestic production going to be processed? And if we can’t process all that oil efficiently – then should we loosen up restrictions that prevent the US from exporting it to other countries?
As we have recently discussed (see Imagine There’s No Export Ban) the debate over US crude oil export policy is about regulations implemented in the 1970’s by the Department of Commerce, administered today by the Bureau of Industry and Security (BIS). These regulations prevent the export of US crude oil except to Canada or in specific narrow circumstances from Alaska and California (see I Fought the Law). Although exports to Canada under license from the BIS have been creeping up (246 Mb/d in March 2014), these are barely making a dent on the large stockpile of crude that has accumulated in the Gulf Coast refining region since the start of 2014 where inventories have been close to record levels since April. Much of that crude stockpile is assumed to be light crude oil that most refiners have a harder time absorbing because their refineries are best suited to heavier crudes. And as we pointed out in “Texas Bound and Flying” even if Gulf Coast refineries ran flat out, it would still take three months for inventories to return to 5-year average levels.
Proponents of an end to the crude export restrictions argue that the new growth in domestic crude production could be rapidly curtailed by refining bottlenecks if the government doesn’t allow exports to relieve the inventory build up. On the other side of the debate are those like independent refiners that benefit from the domestic crude build up. They enjoy lower crude feedstock prices than their international competitors because of the export restrictions and have benefitted from a boom in refined product exports.