Changing U.S. Import Mix

Refiners in the U.S. must make major strategy decisions in the middle of an economic and political conflict over petroleum demand.

Economic signs point to steadily rising use of oil products. Yet political pressures resist the economic impulse. From global warming remedies to subsidies for unconventional fuels, the actions of government reflect clear preference for nonpetroleum energy.

To refiners, political restraints are nothing new. Grassroots refinery construction is all but impossible. Environmental regulation tightens with time.

Refining capacity deficit

Within those bounds, refiners now must grapple with a deficit in refining capacity. Only a few years ago, the problem was capacity surplus of the type still plaguing Europe. Conditions in the U.S. have swung thanks to demand growth, capacity cuts of the 1980s, and plant closures hastened by requirements for reformulated gasoline.

Refiners now meet demand for products with a strategy that can't last. They're raising capacity through debottlenecking and addition or expansion of stills at existing plants. And they're operating capacity at rates near maximum sustainable levels. The average annual capacity utilization rate has exceeded 90% each year since 1993. The average so far this year is nearly 94%.

Utilization rates can't rise much more. And capacity creep has limits, not least of which is space for new distillation towers. The obvious alternative for refiners is to import growing volumes of product.

So far, refiners have avoided the option. Most recent growth in net imports has been for crude oil, not products. During 1981-96, net imports of crude and products rose to 8.5 million b/d from 5.4 million b/d. The high point for net product imports in that period was 1.6 million b/d in 1988, the low point 750,000 b/d in 1995. Average net product imports last year were 1.1 million b/d. The main trend among individual products has been a steep decline in net imports of residual fuel oil, demand for which is in structural decline. Average total imports of both gasoline and distillate climbed, but so did average exports.

From an operating perspective, the numbers make sense. Importing crude as opposed to product makes a refiner better able to match product yield with market need. To take advantage of the flexibility, however, the refiner needs to keep distillation capacity aligned with demand. High and rising capacity utilization rates point to problems in this area.

Indeed, the U.S. Energy Information Administration considers an increase in net product imports inevitable as demand growth outruns expansion of refining capacity. In its Annual Energy Outlook 1997, EIA says products will account for 23% of net petroleum imports in 2015 vs. 10% in 1995 if the world oil price rises 1.4%/year in 1995 dollars to $21/bbl in 2015. If the price is $7/bbl higher in 2015, the product share of net oil imports will be 19%; if the price is $7/bbl lower, the product share will be 26%.

Reduced flexibility

The growth will have important effects. Rising reliance on imported product not only reduces the operating flexibility of refiners but also focuses import dependency. At present, refiners in the U.S. and elsewhere buy crude in a market supplied from many areas of the world. Product in trade comes from a comparatively few export and entrepôt refining centers. Expansion of the product share of rising total import volumes thus makes trade more rigid than before and continuity of flow from specific supply sources more vital to U.S. interests.

Refiners would better serve a nation that thrives on petroleum by expanding distillation capacity than by increasing imports of products. Either way, they'll meet demand. But the flexible way is by far the more secure. Unfortunately, the needed growth in crude capacity would require regulatory changes not likely to occur and investments difficult to make in a political climate hostile to petroleum.

Copyright 1997 Oil & Gas Journal. All Rights Reserved.