Gulf Coast Diesel Crack Habit – Can Refiners Live Without it? - Part 2

Yesterday we learned that Gulf Coast diesel cracks (margins over crude) averaged $12.88/Bbl since August 2010 (read it here if you missed it). The result has been a Gulf Coast diesel-refining boom. Diesel production to feed this boom comes from refining conventional domestic and imported crude supplies that currently feed Gulf Coast refineries. Today we discover how new supplies of unconventional shale crude will force Gulf Coast refineries that process these light sweet crudes to kick their diesel crack habit. 

[Note: This blog is based in part on projections from a new study on the implications of crude oil production growth and the crude quality dimensions of the increasing production from Turner, Mason and Company.  More information on that study can be found in the block at the bottom of this blog.]

We start with a cliff notes refresher on everything you need to know about crude oil refining. Refineries begin with basic distillation. That involves crude being boiled and put into a distillation column. In the distillation column, different product fractions are recovered at different temperatures (see diagram). Light distillates such as gasoline blending components and naphtha are recovered at low temperatures. Mid-range distillates include products such as diesel and heating oil at higher temperatures and heavy products such as fuel oil at the highest temperatures. Most U.S. refineries then have conversion capabilities to reprocess heavy products into middle and light products using sophisticated refining equipment such as catalytic crackers, visbreakers, reformers, and cokers.

Source: EIA

As we learned in “The Bakken Buck Starts Here – Part IV” two broad categories of refinery operate in the US market – those designed to process heavy crudes and those designed to process light crudes. When you distill light sweet crudes they yield light refined products straight away. When you distill heavy crudes they yield greater quantities of heavier and less valuable residual fuel oil. That residual fuel oil can however be converted to increase the yield of middle distillates such as diesel. As we shall see, US Gulf Coast refinery configurations are split between heavy and light crude configurations. With their current inputs of conventional domestic and imported crudes, both types of refinery can produce higher yields of diesel than gasoline when needed. 

In response to the Gulf Coast diesel export boom, refiners in the region have increased diesel production. The refineries in the best position to increase diesel output are those configured to process heavy crudes. At the moment their crude supplies come from Mexico and Venezuela or the Middle East.  For a number of years Gulf Coast refineries have been investing in upgrading their capacity to handle heavier crudes. These investments started long before US domestic shale production began to ramp up in the last two years but they are still going on. Recent presentations by Valero and Marathon Petroleum Company highlight investments in conversion units that produce more low sulfur diesel from vacuum gasoil - part of the residual fuel oil stream. These refinery upgrades are being made by the likes of Valero and Marathon in anticipation of greater supplies of heavy Canadian crudes reaching the Gulf Coast in the next few years. Midwest refiners have also made similar upgrade investments to process heavy crude from Canada.

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