May the 4th be with you! Today — Star Wars Day to many of us — we borrow (and bastardize) one of the most memorable quotes from that epic collection of movies, “May the Force be with you,” to make the point that, like the “Force” that shapes events in the Star Wars universe, for the U.S. oil patch, exports are the lifeblood of today’s market. U.S. refineries are operating at more than 90% of their rated capacity and using as much domestically produced light-sweet shale oil as their sophisticated equipment will allow. That means that virtually all of the incremental U.S. unconventional light-sweet crude oil production will need to be piped to export terminals along the Gulf Coast, loaded onto tankers, and shipped to refineries overseas. In today’s RBN blog, we discuss what this undeniable link between crude oil exports and production growth means for U.S. E&Ps and midstream companies — and the future of the oil and gas industry.
Yoda, the uber-wise Jedi Master who understood the Force that binds the universe more than most, may not phrase things like the rest of us, but as energy-market forecasters it’s hard to argue with his aphorism [in Star Wars: Episode V (The Empire Strikes Back)]: “Difficult to see; always in motion is the future.” What forecaster could have predicted 20 years ago, for example, that the U.S. was about to enter a new, golden age of hydrocarbon abundance. And who in 2019 could have foreseen a global pandemic, or a brutal land war in Europe that would make one of the world’s Big Three oil-producing countries an international pariah.
Prognosticate we must, however, basing our predictions on what we know and how things stand today. What we know is that U.S crude oil production (dark-green bar segments in Figure 1) has been rising almost without pause since the start of the Shale Era, reducing the need for crude imports (blue bar segments) — though the U.S. still imports significant (and critically important) volumes of heavy crude from Canada. We also know that through the 2010s U.S. refineries added incremental refining capacity and did all they could to increase their use of cost-advantaged domestic crude — the orange line in the bar chart shows the steady rise in refinery runs through most of that decade. The problem was (and still is), almost all the incremental barrels produced were (and still are) light-sweet crude, and there are limits to how much of the stuff can be processed at the complex refineries that populate the Gulf Coast. As a result, produced volumes in excess of domestic refinery needs — that is, the portion of the green bar segments above the orange line — have to be exported (also shown in Figure 3). There’s really no alternative.
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