CRUDE IMPORTS TO U.S. GULF COAST REFINERIES TO ACCELERATE

The largest crude oil commodity market in the world-the U.S. Gulf Coast-has experienced an important change in recent years.

"The decline in domestic production and the increase in imports appear destined to accelerate in the coming decades," according to Robert E. Coleberd of Pacific West Oil Data, Mission Hills, Calif.

Coleberd made a presentation titled, "The U.S. Gulf Coast Crude Oil Market: Structure and Change in the 1990s," at the International Association for Energy Economics' annual North American conference, Nov. 9, 1994, in Dallas. His analyses concluded that Latin American countries will continue to be a major source of U.S, imports, and that the shortfall will have to be made up using Middle Eastern crudes, primarily those from Saudi Arabia and Kuwait.

ECONOMICS

The Gulf Coast is the world's largest oil refining region. This position has been guaranteed by the area's accessibility via water to emerging crude producers around the world, and by the growing dependence of the U.S. economy on oil imports, said Coleberd.

For Gulf Coast refiners, U.S. crude competes with crudes from other countries on the basis of:

Conversion potential to light products
Gravity
Sulfur content
Transportation cost
Producer netback
Intermediate feedstocks.

These factors must be taken into account with total demand and the cost of selling crude into other world markets.

Between 1982 and 1993, 35 countries exported crude oil to the Gulf Coast. Coleberd divides these countries into three categories:

Major players - Colombia, Mexico, U.K., Saudi Arabia, and Venezuela
Secondary players - Algeria, Angola, Ecuador, Gabon, Indonesia, Iraq, Kuwait, Norway, Oman, and U.A.E.
Minor players-Argentina, Bolivia, Brazil, Cameroon, Canada, China, Congo, Egypt, India, Malaysia, Peru, Syria, Thailand, Trinidad & Tobago, Tunisia, Turkey, Yemen, Zaire, and others.

The price structure of crude in the Gulf Coast market is complex. Traditionally it has centered around West Texas Intermediate, the price of which serves as a reference for many crudes sold in this market.

"WTI functions as a marker crude," said Coleberd, "because its volume is large enough to significantly influence the total volume in the marketplace, and it is the principal deliverable crude for the Nymex futures contract."

Formula pricing (based on a basket of crudes) also has emerged in the term, or contract, market.

In the future, said Coleberd, the price structure of the crude market in Petroleum Administration for Defense District (PADD) 3 the U.S. Gulf Coast will mirror a fundamental economic theorem: "In a market with a relatively large number of buyers and sellers for a closely substitutable input ... price is set at the margin the last barrel supplied.'

As U.S. crude declined and imports increased, this "marginal" barrel moved offshore. This movement, coupled with the differentials relative to WTI, made the marginal price too low for what was increasingly becoming "high-cost" U.S. production. It also made netbacks to lower-cost foreign producers attractive, despite transportation costs.

U.S. PRODUCTION

Crude oil production from all of the states in PADD 3 (Alabama, Arkansas, Louisiana, Mississippi, New Mexico, and Texas) has declined since 1982. This decrease has been caused by declining reserves, exhaustion of existing fields, and drastically reduced drilling activity.

Table 1 shows crude production in these states between 1982 and 1993. During the study period, Texas' output has declined 3.6%/year. This decline decreased to 4.8% between 1992 and 1993.

Louisiana production began declining in 1987. (Before 1987, the federal offshore area was included in Louisiana's numbers.) The state's output decreased 3.8%/year during the 7-year period since 1987. This decline slowed to 3.1% for 1992/93.

Coleberd said that, with the exception of perhaps New Mexico, production in the marginal Gulf Coast states (Alabama, Arkansas, Mississippi, New Mexico, and Louisiana) is not likely to recover in the foreseeable future. On the other hand, drilling could resume in the federal offshore leasing area, perhaps even reversing the decline and increasing total output from the region.

Alaska North Slope, delivered by pipeline, also has been an important source of crude in the Gulf region, but production has fallen in recent years (Fig. 1).

IMPORTS

Fig. 2 shows the increasing role imports will play in the Gulf Coast. In 1985, imports began rising sharply and by 1988, their use exceeded that of U.S. crude in Gulf Coast refineries.

Until recently, the largest fraction of imports has come from Colombia, Mexico, and Venezuela, because of the shorter transportation distances involved. Petroleos de Venezuela SA's subsidiary Citgo Petroleum Corp. accounts for the increase in use of Venezuelan crudes beginning in 1993. This trend is expected to continue, said Coleberd, as a result of joint ventures such as the new Lyondell-Citgo Refining Co.

Fig. 3 shows the dramatic increase in crudes from Saudi Arabia. In 1991 and 1992, imports from Saudi Arabia were about equal to those from Latin American countries. But the Saudis' decision to supply Kuwait following the Gulf war caused a drop in 1993 imports.

Another indication of the prominence of Saudi crudes, said Coleberd, is the number and size of Gulf Coast refiners that process them. Table 2 lists Gulf Coast refineries and their crude import sources in 1994.

Of the 38 refineries listed, 14 processed Saudi crude, representing about 55% of PADD 3 refining capacity, as reported by the U.S. Department of Energy.

FUTURE

Coleberd expects continuing declines in U.S. production, coupled with economic growth, to extend the trend of increasing crude imports.

Latin America will remain a key source of imports for the region. And Persian Gulf countries will be the logical source of additional imports. He expects U.S. production plus Latin American imports to lag demand by 1.5-1.75 million b/d in 1995, and by well over 2 million b/d in 2000. "Kuwait seems destined to become a major player in this market because of its production potential," said Coleberd.