Refining Capacity

The high cost of gasoline and diesel and their impact on inflation and the global economy has been a major market development this year, with the blame typically being cast on politicians, oil producers and policies intended to limit development of traditional energy resources and encourage decarbonization — and sometimes all of the above. Prices have retreated in recent weeks amid lower consumer demand and worries about the state of the global economy, but long-term concerns about global refining capacity and the possibility of another price spike remain. In today’s RBN blog, we discuss highlights from our new Drill Down Report on the state of global refining.

The cost of gasoline has garnered a lot of headlines since the start of 2022, with the blame for elevated prices falling on seemingly everything and everyone, from the Biden administration’s policies on oil exploration to Russia’s invasion of Ukraine, as well as decisions by major U.S. producers and OPEC not to swiftly boost oil production. Another can't-be-ignored culprit is the loss of significant U.S. refining capacity over the last few years, which has limited the ability of refiners to respond to the strong, post-COVID demand recovery by ramping up production. By and large, the refineries still operating have been running flat out. In today’s RBN blog, we look at the state of global refining, where new capacity is likely to be built, and the headwinds to future investment.

Every day, refineries along the U.S. Gulf Coast produce far more gasoline, diesel and jet fuel than the region could possibly use, and demand for these fuels along the East Coast for transportation and heating is far higher than local refinery production. To help bring the two regions into balance, a complicated network of pipelines, ports, Jones Act vessels and storage facilities has been developed over the past 70 years—and continues to be updated and expanded. Today, we begin a new series on how millions of barrels of these fuels are moved between and within the nation’s largest refining region and the region where more is used than any other part of the U.S.

The deluge of light (and super light) sweet crude from U.S. tight-oil plays like the Permian Basin, Bakken and Eagle Ford has had many effects, including a push by refiners to rework facilities designed for heavy-crude processing to handle an excess of lighter oils. Many of these projects are underway and expected online in the next two years. Today, we consider refinery infrastructure investments that might not pan out in a low crude price world.

Last week RBN co-hosted the “Surviving the Flood” conference with Turner, Mason & Company in Houston. The major theme of the conference was the expected timing and likely impact of a “Day of Reckoning” for the US oil market that could come any time between 2015 and 2020 depending on critical factors influencing market dynamics. If and when the big day arrives, and if export rules don’t change and refinery hardware is not upgraded, Gulf Coast light Louisiana sweet (LLS) crude could be trading at a discount of $15-$20/Bbl to international light sweet benchmark Brent. Today we discuss the day of reckoning and its critical influencers.

Permian crude production is set to increase 0.4 MMb/d to 1.8 MMb/d by December 2018 (Bentek). New pipeline capacity currently being built and planned to be in place by the end of 2015 should comfortably handle the output by then – primarily pushing Permian crude into the Houston market. The bigger question is whether Houston region Gulf Coast refineries can process the new crude without significant reconfiguration. Today we review whether Gulf Coast refiners can handle incoming Permian production.