The U.S. Shale Oil Revolution: a Boon to Some Refiners

The United States has gone through a dramatic resurgence in crude oil supply during the past few years as a result of the unconventional shale oil revolution. The combination of horizontal drilling, hydraulic fracturing, increasing oil price, and the risk taking initiatives of visionaries, notably Howard Hamm of Continental Resources in North Dakota and Mark Papa of EOG in the Eagle Ford, led the way to the growth of production of this unconventional resource that allowed US oil production to reach the 10 million/day level.

Figure 1: Increases in the WTI prices led to unconventional oil production increases beginning in 2009. (Source: EIA)
Figure 1: Increases in the WTI prices led to unconventional oil production increases beginning in 2009. (Source: EIA)

Because US demand has remained flat, this rising supply has dramatically decreased imports by almost 25% from 2005 to 2013. As a result, domestic production surpassed imports for the first time in nearly 20 years!

The unconventional crudes have an important attribute: they are of good quality (light, low sulfur) which is preferred by refineries because they are easier to process than the heavy, high sulfur crudes. The U.S. refining industry is leveraging the availability of these crudes by backing out more expensive, higher priced imported crudes and making additional products. However, because the USA demand for petroleum products is not increasing, this additional production is used primarily to export products to such regions as Latin America and Western Europe. As shown in Figure 2, US exports of products have dramatically increased over the past few years.

Figure 2: Average annual petroleum product exports from 2008 to 2013 (Source: EIA)

So, the refining industry is going through a mini-boom as a result of the increased availability of high quality US crudes. Those refineries positioned logistically to receive these crude slates and have the right process configuration receive the highest benefits. Because of the rapid increase in supply and the US crude oil export ban on domestic crude, WTI prices have dropped considerably, providing a

Figure 3: Gulf Coast Crack Spreads reach $15/bbl (Source: EIA)
Figure 3: Gulf Coast 3-2-1 crack spread; Gulf Coast Crack Spreads reach $15/bbl (Source: EIA)

further advantage for refiners because they can “buy low and sell high” and realize attractive margins. One measure of upgrade is the 3-2-1 crack spread shown in Figure 3 (i.e. roughly 2x gasoline price + 1x distillate price-3x crude price). To make the situation even more attractive to refiners, low cost natural gas from the same source as crude oils is used as cheap fuel for the refineries. This reduces operating costs and further increases “crack spreads.”

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Figure 4: US Total Refinery Utilization (%) (Source: EIA)

Given these incentives, many USA refiners are operating at a very high utilization rates, approaching 95%, and making high margins. Refineries in regions that do not have these benefits are forced to make some serious strategic decisions because they are losing market share. There is a push to allow producers to export US crude again. If that comes to pass, it should impact WTI and product prices and change the advantage that US refineries have been enjoying. What do you think?

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