Despite West Texas Intermediate being discounted, a prominent energy industry analyst group expects U.S. refineries to continue to outperform its global peers.
Addressing delegates at the Energy Construction Forum held recently in Galveston, Texas, Wood Mackenzie Senior Analyst Afolabi Ogunnaike noted the value of discounted North American crude to U.S. refineries, including U.S. light crude and heavy Canadian crude, was $32 billion in 2013. In 2017, it is projected to be $6 billion.
Ogunnaike said 2013’s $25-per-barrel discount not only accentuated the difference between international and U.S. oil prices but also accelerated the push for the ban on oil exports to be repealed.
“That’s pretty tremendous,” he said. “Let’s say you’re producing 100,000 barrels a day. At a $25 discount, you’re leaving $2.5 million on the table every single day. That’s not really sustainable. You would definitely want to have that policy shifted.”
But as exploration and producing companies were “swallowing this bitter pill” of discounted oil prices, as Ogunnaike called it, the refining industry benefitted by taking relatively cheap crude oil and selling their products for the same price as peer companies that were processing expensive crude oil.
In 2013, that benefit to U.S. refineries translated to $32 billion, Ogunnaike said. He estimated approximately 35 percent of the discounted crude oil processed in the U.S. came from Canada.
“Canada is the biggest supplier of crude oil to the U.S.,” he said. “If you followed the Keystone XL ‘debacle,’ you are well aware that Canada has struggled to gain market access for its crude oil supply. And it continues to grow, despite low oil prices in Canada.
“If it’s bad here, it’s horrible in Calgary. Crude oil there is heavily discounted.”
Refineries in the Midwest and the Rockies that have pipeline access to this cheap Canadian crude oil will continue to outperform their peers, Ogunnaike explained.
“This market inefficiency is creating a boom for U.S. refineries that have ready access to the crude oil, particularly those that are very close,” he said. “In 2017, it’s important to note that we shift from having most of that advantage coming from U.S. light crude to increasing dependence on Canada as a source of the crude advantage in the U.S.”
U.S. refineries have the advantage of complexity
Will the loss of this crude advantage lead to the U.S. refining industry being less competitive than its peers in other regions?
“Our answer is no,” Ogunnaike said. “We can still see that U.S. refineries outperformed Europe and Asia, and that’s because the U.S. has a number of advantages that extend beyond crude oil. Natural gas is one of them.”
In addition, refineries in the U.S. tend to be more complex than those in other regions, Ogunnaike said.
“They can handle a wider variety of crude slates and take more heavy crude oil, which tends to be cheaper, and upgrade it into high-value products,” he said. “Refineries in other regions don’t necessarily have that complexity, so the U.S. has that advantage.
“The Greater Houston area has about 4 million barrels per day of refining capacity, and that’s just Greater Houston. That’s more than most countries have. India, which has about a billion people, is at about that level for the entire country.”
Ogunnaike assured attendees U.S. oil discounts are not expected to return to double digits.
“U.S. refineries are still competitive, despite the loss of crude advantages,” he concluded. “U.S. refineries are very well positioned. In our analysis, they dominate the top profile of refineries around the world.”
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