EIA conference speakers warn of US light crude oil’s ‘day of reckoning’

The US could find its light crude oil production growth stymied if it doesn’t allow more of it to be exported, speakers warned during the US Energy Information Administration’s 2014 energy conference’s first day.

John R. Auers, executive vice-president of Turner, Mason & Co. Consulting Engineers in Dallas, described what he termed “a day of reckoning” during a July 14 morning session. This day would come, he said, when US crude production exceeds refining capacity to a point that prices become so heavily discounted to comparable overseas grades that producers decide not to increase production further.

IHS Vice-Chairman Daniel Yergin agreed. “The rationales for a crude oil export ban are gone, but the ban is still in place,” he said during his luncheon remarks. “We see a risk of a $15-25/bbl domestic light crude discount being locked in during the next couple of years, potentially limiting additional investment.”

During the crude export discussion in which Auers participated, Jason Bordoff, who directs the Center on Global Energy Policy at Columbia University’s School of International and Public Affairs, said, “Many people are concerned that if more US crude exports aren’t allowed, refineries will be so overwhelmed with domestic light crude that they’ll deeply discount the prices they’re willing to pay. This is a matter of crude quality, not adequate supplies like LNG exports. Recent experience suggests a lot of the US crude oil production growth forecasts have been conservative. We’re learning more as we produce more.”

Mixed message

Yergin maintained, “Lifting the ban on crude oil exports would signal the US government’s commitment to global markets and energy security. The US has preached to other countries for decades about the need for free flow of resources. How can we say to Japan that it can’t import any of our LNG but must not buy Iran’s oil?”

Meanwhile, US petroleum product exports have surged in recent years because they are not restricted. Questions arose over what constitutes a petroleum product after the US Department of Commerce’s Bureau of Industry and Security (BIS) gave Pioneer Natural Resources Co. and Enterprise Products Partners LP (EPP) permission on June 24 to export condensates (OGJ Online, June 25, 2014).

US Sen. Edward J. Markey (D-Mass.) characterized condensate as “ultralight crude oil” a day later and said the BIS approvals should not have been granted before Congress revised the crude export ban and allowed public comment. US Sen. Lisa Murkowski (R-Alas.) said on July 9 that DOC should align itself with other federal agencies and departments’ treatment of condensate, and allow more of it to be exported.

“Any solutions to the crude export paradigm must be implemented through laws and statutes,” said a third member of the EIA conference’s crude export panel, Jacob Dweck, a partner at Sutherland, Absill & Brennan in Washington who represented EPP before the agency. “By law, BIS must operate under strict confidentiality. But while its rulings are confidential, they can be relied upon by any exporter.”

Its decision that condensate is a product eligible to be exported apparently is based on an idea that crude becomes a product once it’s processed through distillation towers, Bordoff suggested. Continuing the crude export ban doesn’t make sense because the US has spent decades fighting resource nationalism in other countries and promoting free trade, he said.

Targeted investments

“The Saudis have been pricing their crude for US customers below what they might get in the Far East because they want to stay in the US market,” said Auers. “Industry is already making significant investments—mostly in refineries, but also midstream and upstream—to handle specific crudes.”

Many of these outlays will be for facilities with immediate paybacks so problems can be solved quickly, Auers said. A distillate hydroskimmer costing $600 million isn’t as expensive as a light crude refining unit with more capacity, Auers said.

Yergin noted, “Because of regulatory uncertainty, people are building toppers and splitters, but they’re not spending a lot of money on them because they don’t want to possibly be stuck with surplus equipment.”

Antoine Halff, who heads the International Energy Agency’s Oil Industry and Markets Division, said IEA’s latest midterm Oil Market Report found trade shifting from crude to products globally. It forecasts “a very dramatic refining transformation in the next 5 years” with “very significant growth in Asia, particularly east of Suez, and relatively minor growth in Latin America,” he said during an afternoon discussion of changing global product market flows at the EIA conference.

“We expect 95% of this growth to come outside the US,” Halff said. “It will increasingly compete not just with its weak European partners, but also with exports from India and the Middle East. We also expect overcapacity as oil products compete increasingly with products like biofuels and [natural gas liquids] that bypass refineries.”

Contact Nick Snow at nicks@pennwell.com.

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