By April 6, 2015 Read More →

Light tight oil: Boost refining, exports – EIA report

Cost, market risk will determine additional refining of light tight oil, says EIA

Is more US refining of light tight oil for export part of the answer to lower international prices? A new report from the Energy Information Administration suggests it might be.

light tight oil

Domestic USA light tight oil would have to be priced at a level to encourage additional light tight oil runs at existing refinery units.

With the growth in U.S. production of light tight oil in recent years, petroleum refiners in the United States have been processing greater volumes of light tight oil.

To date, increased volumes of domestic light tight oil have mainly been accommodated with no- and low-cost options such as reducing light and medium crude oil imports, increasing refinery utilization rates, making incremental efficiency improvements (crude unit de-bottlenecking).

A new EIA report reviews a range of additional options that U.S. refiners may consider to expand light tight oil processing capacity. The costs of these generic options vary according to each facility size, complexity, location, and a number of other factors:

  • Size. Larger projects to provide additional light tight oil distillation capacity can have a greater overall cost but, given economies of scale, a lower per-barrel cost than smaller projects. However, these larger projects also require a greater commitment to processing larger amounts of crude oil imports into finished petroleum products. With this commitment comes a greater degree of exposure to risks that could affect crude oil supply or petroleum product demand.
  • Complexity. Although the cost of building units that contain both distillation and secondary processing capacity is generally greater in both overall and per-barrel terms than similarly-sized projects that provide only distillation capacity, the more complex facilities can process light tight oil into more refined petroleum products that generate more revenue and, possibly, better margins.
  • Location. It is generally more expensive to build refining units that are greenfield, or not located at an existing refinery, than brownfield projects that are located at an existing refinery. However, greenfield units can be built in areas with better access to markets and lower crude oil transportation costs than existing refinery locations.

Domestic processing of additional light tight oil would enable an increase in petroleum product exports from the United States, already the world’s largest net exporter of petroleum products. Unlike crude oil, products are not subject to export limitations or licensing requirements.

While this is one possible approach to accommodating higher domestic light tight oil production in the absence of a relaxation of current limitations on crude oil exports, domestic light tight oil would have to be priced at a level to encourage additional light tight oil runs at existing refinery units, de-bottlenecking, or possible additions of processing capacity.

The cost of such adjustments or capacity additions, together with the perception of market and policy risks surrounding potential investments, will determine the extent to which light tight oil might need to be discounted to spur those investments.

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