Report: Refiners can handle the flood of light U.S. crude

WASHINGTON — U.S. refiners are boosting their capacity to process the light sweet crude now flooding out of wells nationwide, despite previously gearing up for heavier imported varieties, according to a report issued Wednesday.

The Veris Consulting analysis, based on a survey of refiners (representing 61 percent of the nation’s refining capacity) indicates they plan to step up their consumption of super light crude by more than 730,000 barrels per day over the next two years to better match the high-quality oil increasingly produced from dense U.S. rock formations.

And, if the economics work in their favor, the analysis says, the refiners could absorb even more — up to an additional 798,000 barrels per day in 2016, bringing total super light crude refining capacity to 3.3 million barrels per day.

The American Fuel and Petrochemical Manufacturers trade association, which commissioned the analysis, hopes it will debunk oil producers’ chief argument for crude exports: that U.S. production is outpacing the ability of domestic refiners to process it.

The surveyed refiners have more than enough processing capability to absorb the amount of U.S. light oil production that the government’s Energy Information Administration has predicted for the next two years, said AFPM President Charles Drevna.

“The survey, based on actual refiners’ plans — or, may I say, facts — tell us they will not be constrained in the next few years and will be able to continue to use the new crude oil being produced,” Drevna told reporters in a conference call to discuss the survey.

“We can handle it now, we can handle it in 2015 and we can handle it in 2016, Drevna added. “There may be a time going forward where we can have the debate in earnest and things may change but to say that we should unilaterally lift the ban on crude oil exports because domestic refiners can’t take any more of the product is just erroneous, and we wanted to show that that is not the case.

According to the Veris report, “U.S. refiners are not capacity-constrained in the next several years to use the growing super light production from U.S. tight oil formations.”

AFPM released the study a day before a Senate Energy and Natural Resources Committee hearing set to examine whether 1970s-era restrictions on crude exports should amid soaring domestic production. Oil producers argue that the trade limitations and refining capacity constraints combine to suppress the domestic price for their crude, now trading for about $10 per barrel less than international Brent.

The export ban applies to raw, unprocessed crude but does not limit trade of refined petroleum products such as diesel and gasoline.

Domestic refiners have already stepped up their use of light, sweet U.S. crude — partly incentivized by the discount — by replacing light and medium imports.

But additional increases in light tight oil refining capacity have not happened in lockstep with the climbing production, said analysts with IHS, an energy consultancy that issued a separate crude export study on Tuesday. And while refiners can be induced to take on more light, sweet crude, they typically want price discounts to make the change.

“At a price, you can roll out more tight oil, but in order to do that, you’re displacing a quality of barrels that are much different and effectively de-rating the refinery,” said Kurt Barrow, IHS vice president of oil markets. For example, “if you take a 100,000 barrel-a-day sour crude refinery, you can only run 70,000 barrels a day of light sweet. You can do that at the right price signal.”

The new refining survey acknowledges the importance of the price considerations, framing the capacity question as “how much U.S. light sweet crude domestic refiners might be able to use with competitive economics.”

The report’s projection for an addition 798,000 barrels per day of capacity in 2016 represents the potential volumes that could be run “if economics were favorable and if the crude oil were not an issue.”

The surveys completed by refiners did not specify explicit economic requirements and instead asked for estimates based on “price incentives large enough to use as much light crude oil as you can” and assuming access to an “unlimited supply of U.S. light crude.”

A spokesman for Producers for American Crude Oil Exports said that undermined the analysis.

“If refiners had the capacity and interest to refine all the light oil being produced in the U.S.,” spokesman Patrick Creighton said, “we would not have a glut of crude oil, storage wouldn’t be at 80-year highs and refiners wouldn’t be exporting light crude to Canada by tanker for processing.”

Refiners say the biggest constraints aren’t at their facilities but in the infrastructure that delivers crude to them.

“U.S. refining is not a bottleneck to producing and using more very light U.S. crude oil over the next few years,” the report says, noting separately that an “inadequate delivery infrastructure has delayed U.S. refinery access to the new production.”

Drevna acknowledged the logistical challenges. “For the refiners, getting the crude oil has been a much bigger issue than refining it,” he said. “Gaining access to this crude will be a continuing issue, but the survey shows there is some time to have the debate (on how to) respond to the changing energy landscape.”

Because the report represents just 61 percent of U.S. refining capacity, the actual potential may be even higher, Veris says: “Given the fact nearly 40 percent of the industry is unrepresented, nationwide refinery plans and physical capability to run additional light crude oil exceed the volumes represented in this survey.”

U.S. refiners have taken varying positions on the possibility of crude exports, with AFPM’s Drevna insisting that the group supports free trade — but wryly observing that there isn’t a free market for oil.

Some inland refiners have formed a coalition to lobby against oil exports, with Delta’s Monroe Energy refining unit playing a high-profile role in the campaign.

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