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Page added on March 17, 2014
Will Shale Oil Growth Lead to New US Refineries?
- The revival of US oil production is spurring new investments in refineries, including the restart or new construction of small refineries near these resources.
- How well such investments perform will depend on both the longevity of shale oil production and policies concerning its export.
An article on the revival of some mothballed US oil refineries and the possible construction of new ones provided yet another indication of industry confidence that record growth in oil production from US shale deposits isn’t just a temporary phenomenon. Refineries–even small ones–aren’t usually quick-return investments. Restarting one or building a new one requires a positive view of future feedstock availability, product demand and other uncertainties.
The number of US refineries has fallen steadily, from 301 in 1982 to 143 last year. Because this mainly involved the retirement of smaller, less efficient facilities, while larger refineries “de-bottlenecked” or expanded, US refinery capacity actually grew over this period. It’s generally cheaper to expand an existing facility, leveraging its infrastructure and experienced staff, than building a “grassroots” facility.
The hurdles facing new refinery construction in the US have been compounded by environmental regulations covering permits, emissions and product specifications. The time when a new entrant could simply distill light crude oil, sprinkle in some tetraethyl lead and other additives, and sell a full slate of refined products is long gone. New refineries in North Dakota, Texas and Utah are apparently focused on producing diesel fuel from the shale, or “tight” oil in the Bakken, Eagle Ford, and Uinta shales, respectively, and selling the rest of their output to other refiners or petrochemical plants as feedstocks.
With diesel demand in the producing areas booming, thanks to the needs of drilling rigs and the trucks that haul water, sand and equipment, as well as oil from leases not connected to pipeline gathering systems, this opportunity could last as long as the drilling-intensive shale development does. In other words, the demand aspiring refiners see appears to be linked directly to their source of supply.
Meanwhile larger plants, such as several of Valero’s Texas refineries, are in various stages of investments to enable them to process more light oil, reversing a multi-decade trend of investment to handle increasingly heavy and sour (high-sulfur) imported crudes. As with the smaller refineries, this shift requires high confidence in the long-term availability and favorable pricing of these high-quality domestic crude oil types.
The reasonableness of that assumption depends on the longevity of tight oil production. Large conventional inland oil fields typically reach peak output within a few years and then decline gradually, with long plateaus. Whether shale deposits, with their distinct geology, will follow the same pattern remains to be seen. Despite a few projections suggesting that tight oil output of the major shale basins could soon peak and decline rapidly, most mainstream forecasts suggest a long life for these resources, particularly as the technology to develop them continues to improve.
For example, in its latest Annual Energy Outlook, the US Energy Information Administration (EIA) anticipates US tight oil production reaching 4.8 million barrels per day (MBD) by 2021, before gradually declining back to levels near today’s in 2040. By contrast BP’s just-released Energy Outlook 2035 sees comparable growth over the next few years but little subsequent decline, with tight oil at 4.5 MBD in 2035. Meanwhile, ICF International recently issued its Detailed Production Report, projecting shale/tight oil production in the US and Canada to reach 6.3 MBD by 2035, including 1.3 MBD from the tight oil zones of the Permian Basin of Texas.
The other big uncertainty concerning the availability of light tight oil for new or expanded US refineries depends on federal export policy, which I addressed in a recent post. This issue is highly controversial. A quick reversal of existing rules would be surprising, though as the New York Times noted, possible compromises under existing law could facilitate an expansion of crude oil exports beyond current shipments to Canada. While unlikely to dry up domestic availability of tight oil, such measures could shrink the current discounts for these crudes, compared to internationally traded light crudes like UK Brent. That seems less of a risk for small, simple, inland refineries than for larger facilities, especially those near coastal ports.
This isn’t the first time investors have considered the need for new US refineries. There was similar interest after hurricanes Katrina and Rita slashed Gulf Coast refinery output for several weeks in 2005, though it ultimately led nowhere. If today’s circumstances prove more supportive, it will be because the US hasn’t experienced anything comparable to the shale revolution since the 1920s and ’30s, when rapid oil production growth was accompanied by a wave of refinery construction, though in a very different business and regulatory climate. If that parallel holds, consumers stand to benefit from the resulting increase in competition.
13 Comments on "Will Shale Oil Growth Lead to New US Refineries?"
rockman on Mon, 17th Mar 2014 1:45 pm
One of the factors that Valero has to take into consideration about expanding its facilities in Texas to utilize Eagle Ford Shale production is the little trick used to bypass the oil export ban: they aren’t exporting “oil” but a “refined product”. They run the EFS oil thru a minimal upgrader plant and thus turn it into a refined product for which there is no export limitation. These “products” are then shipped to eastern Canada refineries that are better suited (more profitable crack spread) to do the job. So much better that it’s worth paying the transport costs. So far two oil pipelines have been reversed allowing the EFS production easy access to the export terminal at the port of Corpus Christi. While a Valero Texas refinery wouldn’t have that transport cost they would have to amortize the cost of their upgraded plants into the pricing model. That, and the uncertainty of long term EFS supplies, might offer some resistance to any expansion plans.
Boat on Mon, 17th Mar 2014 3:18 pm
rockman
I believe we touched on this topic once. In very rough numbers we refine around 17 million barrels per day and out of that we export now close to 4 mbpd.
In previous decades refineries shut down when there wasn’t a market in the area. It appears that the refineries can import crude and resale the refined product overseas and make enough of a product.
So what the author of the article misses is the profit margin of the refineries to survive.
The high price of fracked oil has driven the market place like you have mentioned many times and allowed these other types of plays as a result.
Kenz300 on Mon, 17th Mar 2014 3:23 pm
Rather than build or restart oil refineries biofuel plants should be build.
Every landfill in the country can be converted to produce biofuels from waste or trash. This is more sustainable. It is better than burying the trash.
Boat on Mon, 17th Mar 2014 3:28 pm
I should have proof that last comment. I meant to say It appears that the refineries can import crude and resale the refined product overseas and make enough of a profit. Comment on my opinion that The high price of fracked oil has driven the market place and has allowed other types of plays as a result.
rockman on Mon, 17th Mar 2014 3:30 pm
Ken – Of course the problem is that Valero et al are oil refiners so one shouldn’t expect them to provide any financial support to an industry that would compete with them. So it sounds like you need to round up some investors and get some biofuel plants built. Good luck, me amigo.
Boat on Mon, 17th Mar 2014 3:45 pm
Kenz. All energy is market driven unless supported by mandates or regulation or subsidies. If you believe one energy is cleaner or better suited than another then the costs of pollution, carbon, health costs etc would be measured and charged to reflect the true cost.The market would take these new calculations into account and the difference may or may not change our energy mix. I for one would expect the tar sands to be a loser under this scenario. The trick of this scheme is for it to be global. I don’t think that will happen.
Nony on Mon, 17th Mar 2014 4:19 pm
The splitters have been talked about for a long time. Now they are being built or pre-existing ones used more. In a way, it’s no more of a cheat than refineries using trapped WTI (discount versus Brent) to make gasoline and then exporting finished product.
Should have cut out the crude export ban. It is really some stupid 70s price control holdover. Economists from both the left and right are in favor of free trade.
The export ban is not even helping US gasoline customers. Just benefiting refiners versus producers.
bobinget on Mon, 17th Mar 2014 5:49 pm
Canada’s West Coast could certainly use a refinery to process both heavy, oil sands and light ‘conventional’
oil replacing current East Coast Brent priced imports.
Canada’s balance of payments, especially with a .90 cent loonie, could be helped enormously.
Often overlook by some is tremendous quantities of natural gas consumed in refining process. Today
in Eastern US, best prospects for reliable production, steady consumption, are Marcellus fields of Pennsylvania.
Propane, a direct refinery product, was in short supply this winter. No doubt more refineries would
help with propane distribution.
While it’s true many coastal refineries import crude
then turn around and export product, this because
tankers offer excellent rates for ‘return’ cargo.
This also works for choo-choo trains but not pipelines.
Boat on Mon, 17th Mar 2014 8:57 pm
Nony So you support the producers more? What is the point. If there is more money to be made than in the past refining oil, is this a bad thing?
bobinget Interesting comment about how much Nat Gas is used in refining. Is this why refining is making a come back?
Kenz300 on Mon, 17th Mar 2014 11:52 pm
Rochman — Valero has acquired 10 state-of-the-art ethanol plants. This makes it the first traditional refiner to enter production of ethanol. Valero Renewable Fuels subsidary …
Boat —- The energy transition tipping point is here – SmartPlanet
http://www.smartplanet.com/blog/the-take/the-energy-transition-tipping-point-is-here/?tag=nl.e660&s_cid=e660&ttag=e660&ftag=TRE4eb29b5
rockman on Tue, 18th Mar 2014 1:49 am
Ken – Thanks…missed that pertinent fact. I wonder if part of the motivation was to make sure they complied with the feds.
Nony on Tue, 18th Mar 2014 2:24 am
I’m in favor of free trade. For one thing it incentivizes production itself. The refiners are two-faced since they export finished or separated product anyhow.
GregT on Tue, 18th Mar 2014 4:59 am
The US is a net importer of crude oil, not a net exporter.