Heaven Sent Blend – A Mars/Eagle Ford Mix

Domestic light sweet crude from the Eagle Ford is now arriving at Gulf Coast refining centers as infrastructure investments come on line. The marketplace has yet to formalize a transparent price mechanism. The quality of Eagle Ford varies considerably so there is no “standard” refinery yield. Gulf Coast refineries are not typically configured for such light sweet crudes. Today we review refining possibilities for Eagle Ford crude.

Before we start – a recap for those of you that have missed the Eagle Ford series so far. Skip to the next paragraph if you are a regular. In Part I we covered why the Eagle Ford shale is attracting producers like bees to a honey pot. Eagle Ford crude production is close to 600 Mb/d as of July 2012. We learned that Eagle Ford crude fetches better prices than similar quality Bakken crudes and touched on the discounts being applied to condensate. In Part II we began our review of Eagle Ford routes to market (either south to Corpus Christi or East to Houston) by describing large scale takeaway investments by Enterprise and Koch. In Part III we detailed additional takeaway projects being built or planned by Nustar, Magellen, Plains and Kinder Morgan. These projects - all expected online by 2013 have capacity for 1,650 Mb/d. Most forecasts show production increasing to about 1,200 Mb/d over the next five years - considerably below the takeaway capacity being built. In Part IV we assessed transport costs to market and found Eagle Ford costs compared favorably with Bakken crude.

Moving Price Target

Today we set out to look at refining margins for Eagle Ford crude delivered to Gulf Coast refineries but things didn’t quite work out as planned. Refining margins are calculated using the sale price of refined products less the market price of the crude. The trouble is the market price of Eagle Ford crude is a moving target. The market has yet to settle on a standard approach or location to price Eagle Ford. On the same day last week (Friday, August 17, 2012), Enterprise Products published a crude oil posting of $92.46/Bbl for Eagle Ford crude, Flint Hills posted $98.25/Bbl and Plains posted $101.74/Bbl - a range of nearly $10. Elsewhere a 5-year deal for a major refiner to purchase Eagle Ford at Light Louisiana Sweet (LLS) less $7.50/Bbl has been reported and that price would have worked out at $106.64/Bbl on Friday.  Such variations suggest that the quality of Eagle Ford crude is wide ranging. For example, Flint Hills quote 8 different types of Eagle Ford crude in their crude posting bulletins (see http://www.fhr.com/refining/bulletins.aspx). As we discovered in “The Bakken Buck Starts Here – Bakken Crude Pricing Part I” crude postings are also subject to gravity adjustments for different API gravities and Eagle Ford crude has unusually high API gravities.

No Standard Yield

Assuming that you could tie down a crude price, then the refining margin depends on the refined product yield from a typical refinery configuration using Eagle Ford. Once again Eagle Ford does not yet have a widely agreed upon specification or “typical” refinery yield. As a result, we struggled to arrive at meaningful refinery margin numbers based on running Eagle Ford crude through a “typical” Gulf Coast refinery.

Shale Crude Refining Challenges

Part of the reason that it is hard to find a standard Eagle Ford yield definition is the range of Eagle Ford crude types out there. As we touched on yesterday (see Rocky Mountain High: Crude Oil & NGL Surpluses) there are also other specific challenges when it comes to refining shale crudes.

The US Gulf Coast is home to the most sophisticated refineries in the world. In Part IV of this series we talked about differences between refineries designed to process heavy crude and those designed to process light crude. The trouble is that Eagle Ford crude is super light. The majority of US Gulf refineries are ill equipt to process crudes as light and sweet as Eagle Ford (or for that matter Bakken) economically. That is because these light crudes do not require the expensive upgrading units refiners have invested in to break down residual fuel oil – because there is very little fuel oil in Eagle Ford or Bakken. But they do require the capacity to handle large volumes of ‘light-end’ cuts.  Another challenge is that if you process very light sweet crudes in these high tech refineries they can produce more light gasoline pool products than they were built to handle – forcing an expensive reduction in throughput capacity.

Blending To Taste

In the short term refiners cannot easily abandon their complex investments and reconfigure for lighter sweet crudes. What they can do and what they are doing however is to take advantage of another important refinery operating variable that we haven’t talked about so far in this series – blending. The fact is that refiners rarely just refine one crude type at a time. They have always blended different crudes to maximize the economic output of their refineries.  By blending the new lighter shale crudes with imported or offshore heavier crudes refiners can optimize their crude diet to their refinery complexity.

Blending in Mars

So – temporarily stymied by trying to calculate margins based on refining Eagle Ford on its own and not to be deterred - we decided to work up a blend of our own. To illustrate Gulf Coast refiner blending margins we used a “recipe” that we have heard Gulf Coast refiners are using. That recipe is a mixture of Eagle Ford crude with Mars crude.

Mars is itself a blend of crudes from the Mars, Ursa and Perdida fields in the Gulf of Mexico (GOM) that is “medium sour”. It has a sulfur content of 1.77 percent and an API of 28.7 (March 2012). Mars crude is delivered from the GOM to the Louisiana Offshore Port (LOOP) and refineries throughout the Gulf Coast. We know that Eagle Ford producers can deliver crude to St James LA by train or by barge along the coast from Corpus. (We also know that Bakken crude is being delivered by rail to St James and could be substituted into our recipe just as easily). Market reports suggest that by blending together Mars with Eagle Ford, refiners can achieve a crude that has similar characteristics to Louisiana Light Sweet (LLS) – the Gulf Coast benchmark. LLS typically produces more valuable middle distillate products. Importantly, our blended recipe for LLS is less expensive than buying “real” LLS because LLS is priced internationally against Brent – some $20 higher than WTI. Using the Mars/Eagle Ford blend is like buying the generic version instead of the name brand.

For the Eagle Ford crude price in our worked example we will use a discount to LLS of $7.50/Bbl based on that long-term deal to purchase Eagle Ford referenced above.  We will also use our previous estimate from Part IV of transport cost from the Eagle Ford (pipeline to Corpus and Barge up the Gulf Coast) to St James LA –  $2.70/Bbl.

Assuming that the blend ratio for Mars and Eagle Ford is 50/50 will make our math a lot simpler although refiners will “blend to taste” for their particular configuration. The cost of our crudes in St James LA will therefore be as follows (based on Friday August 17, 2012 prices):

            Mars crude                                                                                     $108.96/Bbl

            (LLS Crude                                                                                      $113.64/Bbl)

            Eagle Ford (LLS - $7.50 differential plus $2.70 transport)               $108.84/Bbl

            Mars/Eagle Ford 50/50 Blend                                                          $108.90/Bbl

Out blended crude therefore costs $108.90/Bbl delivered to St James LA versus $113.64 for the equivalent LLS crude.           

Last time we calculated refining margins (see The Bakken Buck Starts Here – Part IV) we simplified things by using a 3-2-1 Crack spread margin to approximate a light sweet crude refinery producing two barrels of gasoline for every barrel of diesel. (Remember that crack spreads are rule of thumb calculations based on approximations of refining operations).  This time around we will calculate a slightly more complex crack spread to approximate LLS refining margins – the 6-3-2-1 crack. This crack spread is based on 6 barrels of crude producing 3 barrels of gasoline, 2 barrels of diesel and 1 barrel of fuel oil. Our Gulf Coast refined product prices (again for Friday August 17) are estimated as:

                             Unleaded Gasoline                            $118.41/Bbl

                              ULSD                                                $133.27/Bbl

                              Fuel Oil (1% Sulfur)                           $108.00/Bbl

Doing the math for our 6-3-2-1 crack spread we get the following:

            6 Barrels of Crude @ $108.90/Bbl                        ($653.40)

            3 Barrels Gasoline @ $118.41/Bbl                        $355.23

            2 Barrels Diesel     @ $133.27/Bbl                        $266.54

            1 Barrel Fuel Oil    @ $108.00/Bbl                        $108.00

            Total                                                                   $  76.37 / 6 Barrels  = $12.73/Bbl

The 6-3-2-1 crack spread margin for our 50/50 Mars/Eagle Ford blend is $12.73/Bbl

If we do the same calculation using the LLS crude price of $113.64, the margin goes down to $7.99/Bbl – meaning that by blending domestic Eagle Ford with Mars a refiner can get the same or similar refined product output with a $4.74/Bbl improvement in margin.

For comparison we also went ahead and did the math for a Bakken/Mars blend as follows:

Assume the Bakken crude cost is equivalent to the Clearbrook price on Friday August 17, 2012 a $1 differential to WTI NYMEX or $95.01/Bbl. We estimate the rail transport cost to St James LA by train from the Bakken to be at least $15/Bbl – giving a delivered Bakken price in St James of $110.01.

The cost of Mars is $108.96/Bbl meaning the 50/50 Bakken/Mars blend would be $109.49/Bbl.

Substituting the Bakken/Mars blend into our 6-3-2-1 crack spread results in a margin of $12.14/Bbl. That margin is $0.59/Bbl lower than we get using Eagle Ford – reflecting higher transport costs, but still $4.15/Bbl better than using LLS.

Given that our examples are simplistic and that all of these numbers vary with market conditions and refinery configurations, we can still draw some basic conclusions:

1. Blending light sweet shale oil crudes such as Eagle Ford or Bakken with heavier crudes such as Mars can boost refining margins and help refiners handle very light sweet shale crudes
2. Buying domestic shale crude right now is considerably less expensive than light sweet crudes priced in reference to international crude values,  such as LLS
3. Lower Eagle Ford crude transport costs provide a competitive edge over Bakken crude on the Gulf Coast

Back Down to Earth

Summing up, refining light sweet shale oil crudes in the US is still a new experience. We will return to this topic in more detail in the coming months. Our rule of thumb Eagle Ford/Mars blend example shows how the benefits of more complex refineries and lower priced light sweet crudes can come together today. That works fine as long as supplies of light sweet crude are not too plentiful. The bigger challenge comes when there is more light sweet crude than can be practically blended into Gulf Coast U.S. refinery supplies.   When that happens we need to figure out export options for shale crudes…..but that can be a topic for another blog.