Sweet Dreams Are Made of This - Cheap Crude and Captive Market Boost PNW Refineries

The five refineries in the U.S. Pacific Northwest (PNW) performed better in 2016 than rivals on the East Coast for two main reasons. First, the changing pattern of North American crude supply has worked to their advantage. Faced with the threat of dwindling mainstay crude supplies from Alaska, refiners in Washington State replaced 22% of their slate with North Dakota Bakken crude moved in by rail. They have also enjoyed advantaged access to discounted crude supplies from Western Canada. Second, PNW refiners face less competition for refined product customers than rivals on the East and Gulf coasts, meaning they have a captive market that often translates to higher margins. Today we review performance and prospects for PNW refineries.

This blog is based on Morningstar Commodities and Energy’s recently published Pacific Northwest Refining Outlook. See contact information at the end of this blog to request a copy of the report.

Back in October 2016 we described how East Coast refiners were suffering in 2016 because they had lost the crude supply advantages they enjoyed during the shale boom (see Back to Red). Lower crude prices and narrower spreads between inland shale crude in North Dakota and imported crude priced against international benchmark Brent on the East Coast have reduced crude-by-rail shipments from the Bakken. On the West Coast the crude benchmark for PNW refineries is Alaska North Slope (ANS). We have previously covered the challenges presented by declining ANS production (see In The Year 2025, After The Oil Rush and Anchored Down in Anchorage). We have also covered increased rail shipments of Bakken crude to PNW refineries (see The End of the Line).

PNW Refineries

Five refineries in the Puget Sound region of Washington State with a combined 634 Mb/d capacity serve the Pacific Northwest. BP, Shell, Tesoro, Phillips 66, and U.S. Oil own these refineries, which are located in the Energy Information Administration’s (EIA) Petroleum Administration for Defense District (PADD) 5 or West Coast region (see Figure 1). The two largest refineries, belonging to majors BP and Shell, each have coking capacity to process heavy crudes. The rest mainly process light or medium crude grades.

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