The United States can boost its consumption of the light oil increasingly flowing out of domestic wells today, a new government report finds, even as it warns that potential changes to the nation’s longstanding ban on raw crude exports risk undermining those investments.
The analysis issued by the government’s Energy Information Administration is the fourth in a series of studies examining U.S. oil production, imports and gasoline prices in light of the nation’s crude export ban. Producers who have been clamoring for the opportunity to sell their crude overseas have said the change is needed because domestic “light, tight oil” production from dense rock formations is outpacing the transportation and refining infrastructure needed to process it domestically.
Refiners have already pared imports of light crude, boosted their utilization rates and made efficiency improvements, allowing them to take on more domestic supplies — often buying the U.S. oil at a discount compared to international alternatives. And some facilities also have curbed imports of medium-grade crudes.
But there is relatively little room left to expand domestic light crude consumption through these low-cost options, EIA says.
Instead, the agency points to a host of investments that could help process additional light, tight oil within the United States, including installing splitters and stabilizers. Refiners could add new atmospheric distillation capacity, or go even bigger, installing those distillation towers along with secondary processing units to create finished products such as gasoline and jet fuel.
But EIA suggests that refiners will gravitate to projects that can be swiftly deployed for less money. They “are likely to find smaller- scale and lower-cost options the most attractive,” the agency says.
The cheapest option is adding a stabilizer unit (which removes light gases and liquids from the crude stream) to an existing refinery — giving a company the opportunity to process increased domestic light tight oil production with a relatively small exposure to decreases in crude supplies or demand for petroleum products. Another relatively low-cost option is adding atmospheric distillation units to existing facilities, without new secondary processing equipment to transform the resulting naphtha into finished products.
But lower-risk capacity-boosting projects often come with added cost, EIA notes.
“For projects of a given type, larger-scale projects generally have lower unit costs due to well-known economies of scale,” the EIA says. “However, the lower unit costs or larger units must be weighed against the potentially substantial risks associated with their higher absolute cost and longer lead times, which increase exposure to changes in the cost and availability of crude oil inputs and changing conditions in petroleum product markets.”
Refiners have already been burned before, having invested billions to process heavy crude, before U.S. production shifted to lighter grades from energy companies employing horizontal drilling and hydraulic fracturing to pull crude out of dense rock formations.
And the policy uncertainty in today’s environment is likely to discourage them from sinking capital into expensive projects, EIA suggests: “One major policy risk is the possibility that current restrictions on U.S. crude oil exports will be relaxed or eliminated, which could significantly lessen the future value of additional domestic processing capacity.”
All of those risks could encourage investors to demand a high rate of return over a short time frame, EIA notes.
So far, refiners and midstream companies have proposed, designed, begun building or completed splitter projects with the capacity to process 645,000 barrels per stream day, including facilities in Port Arthur, the Houston Ship Channel and Corpus Christi.
Valero is adding 160,000 barrels per stream day in additional hydroskimming capacity in Houston and Corpus Christi. Hydroskimmer refineries — also known as topping-reforming refineries — include distillation units to distill light oil and a relatively modest set of secondary processing units (generally reformers and hydrotreaters but not crackers and cookers).
The planned capacity expansions described by the EIA appear to track refiners’ previous estimates.
“Nobody should underestimate the ability of America’s world-class refining sector to adapt,” said Sen. Lisa Murkowski, R-Alaska, the head of the Energy and Natural Resources Committee who sought the EIA’s ongoing crude exports analysis last year.
But, she added, “our nation doesn’t have to choose between a vibrant system of refineries here in the United States . . . and allowing American crude oil producers to compete on the global market with the likes of Russia and Iran.”