Energy Information Administration (EIA) data for January 2014 indicates that US crude production has now returned to levels not seen since December 1988. Canadian crude production is also at record levels. The prospects look good for a combination of US production and Canadian imports to free the US from overseas imports by the early 2020’s. But along with this success comes a challenge balancing new streams of crude that are predominantly light with a lot of refinery capacity configured to process heavier crude. This balancing act is compounded by a ban on US crude exports. Today we review the contrast between crude and refined product export rules.
This blog series is about export rules we’re calling the ‘Molecule Laws’. The “laws” are actually a hodge-podge of rules, policies, regulations, procedures and a few laws administered variously by the Department of Energy (DOE), the Federal Energy Regulatory Commission (FERC), the State Department, and the Department of Commerce. The laws paint a confusing picture regarding export restrictions on different hydrocarbons. In episode one (see The Molecule Laws) we covered the complex hoops that LNG exporters have to jump through to get DOE and FERC approvals under Molecule Law #1: Methane molecules can be exported based on destination (Canada & Mexico are ok) and in the form of LNG to other countries from approved terminals. In episode two (see The Molecule Laws – NGLs) we learned about rules applying to natural gas liquids (NGL). First Molecule Law #2 : Propane and butane molecules can be exported to any non-sanction country, regardless of the needs of the U.S. market that has facilitated booming liquid petroleum gas (LPG) exports in spite of severe propane shortages in the Midwest this past winter. Second we discussed the “separation at birth” of plant condensate – known as natural gasoline - that is subject to Molecule Law #3: Natural gasoline molecules can be exported to any non-sanction country, regardless of the needs of the U.S. market and its close sister lease condensate collected at the wellhead to which an entirely different set of rules apply under Molecule Law #4: Condensate molecules can only be exported to Canada, even if they are the exact chemical equivalent of natural gasoline, and would have been produced as natural gasoline had the weather been warmer. This time we contrast the export rules for crude oil and refined products.
According to data from the US Energy Information Administration (EIA), since 2009 US crude production has shot up like a skyrocket - returning to levels last seen in December 1988. US crude volumes are up 58 percent from about 5 Mb/d in 2009 to 7.9 Mb/d in January 2014. Over the same period the Canadian National Energy Board (NEB) estimate that crude production increased by 41 percent from 2.7 MMb/d in 2009 to 3.8 MMb/d in January 2014. U.S. and Canadian production combined are expected to increase by a further 4 MMb/d over the coming five years to the end of 2019. These growing production numbers have considerably reduced US dependence on imports from other countries. If we combine US production and Canadian imports the two countries have met a growing proportion of US crude requirements. US net imports from other countries aside from Canada declined by 58 percent from 7.8 MMb/d in January 2009 to 4.5 MMb/d in January 2014. By 2019 that combined import number will be down to around 1 MMb/d – raising the prospect of North American crude supply independence in the early 2020’s. And that is a good thing. Makes you wonder about the utility of the US Government crude stockpile known as the Strategic Petroleum Reserve (SPR) – currently about 700 MMBbl.
But with all the new domestic and Canadian supplies hitting the market, there is an emerging challenge of crude oil “balance”. That challenge results from a mismatch between US refinery configurations biased toward heavy crude processing and new US supplies that are predominantly light crude (although the smaller volumes of Canadian crude are mostly heavy). Ten to fifteen years ago, when today’s US refiners were planning their long term investments in crude processing, they faced a world with diminishing supplies of easy to process light sweet crude and increasing supplies of heavy crudes (like those from Canada) requiring complex processing to extract lighter hydrocarbons that the market values (see Charge of the Light Brigade). Those investments in heavy processing capacity are just now coming online – for example the huge (400 Mb/d) BP Whiting, IL refinery converted from processing light sweet to heavy crude. And yet the bounty of shale oil production over the past three years has included a dramatic increase in light sweet crude production – much of it very light hydrocarbons more properly called condensate (see Like a Box of Chocolates). And while heavy crude from Canada is starting to make its way to the Gulf Coast where fifty percent of the nation’s refineries are located, congestion and delays in building pipelines out of Canada have delayed these flows. In the meantime an excess of light crude has headed to the Gulf Coast from North Dakota – bypassing pipeline congestion by adopting rail or barge transport - and from Texas, which is closer to market.
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As a result US refineries can expect to be handling a changing diet of crudes over the next 4 years. They will process rising volumes of light sweet crude and condensate from shale in an attempt to absorb as much of these domestic grades as they can. However, refineries configured to process heavy crude will also process higher volumes of these grades – sourced primarily today from Venezuela and Mexico but in the future increasingly from Canada. And imported light sour and medium crude processing will decline as domestic and Canadian barrels back out these grades. But the preponderance of light sweet crude is already beginning to overwhelm refinery capacity to process these grades – particularly on the Gulf Coast – and molecule law #5 places a major obstacle in the way of letting the market resolve the problem. Molecule Law # 5 says that Crude oil molecules can be exported to Canada (as long as they stay in Canada), if they come from Alaska, or if they come from certain heavy oil fields in California. In effect, the law bans the export of domestic US crude oil (including – as we learned in Part 2 - wellhead condensate) to pretty much anywhere except Canada. And that prevents US producers from selling any surplus light crude and condensate to overseas markets. Without the crude export ban, this imbalance between light and heavy crude would simply even itself out with exports of light and imports of heavy. But instead, a law put on the statute book in the 1970’s during a time of shortage, is now having unintended consequences for the smooth operation of US refineries during a time of surplus.