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ISSUES....
Inside, confidential and off the record

 

U.S. oil what's coming?


The alternatives open to the country are basically exporting some of its increased production or to apply this new production to minimize and, eventually, to eliminate import requirements. It would seem that U.S. exports of crude oil, at this moment in time, will be more beneficial in almost all respects to the overall U.S. economy and national interest than trying to replace oil imports with the new domestic production.

The Export Ban on U.S. Crude Oil Has Been Lifted: What's Next?

As we said in our previous article on this topic , a bipartisan compromise just before the 2015 Christmas holiday break brought the 40-year ban on crude oil exports to an end, as Congress passed and President Obama signed the $1.8 trillion omnibus spending and tax bill.

We added that such a decision would set the stage for the U.S. oil and gas sector to decide when and how much crude oil to export, based on diverse technical and economic considerations. In this second article we examine the alternatives open to the country, which are basically exporting some of its increased production or to apply this new production to minimize and, eventually, to eliminate  import requirements.

The decision will depend on several factors, including the outlook on prices, the domestic refining and storage capacities, the capability of U.S. producers to maintain high levels of domestic production and geopolitical considerations, particularly those related to the European energy dependence on Russian gas. Factors such as these would have to be taken into account in order to determine what the national economic and political benefit would be if the U.S. decides to export significant volumes of crude oil.

The price issue

The price of oil in the global markets will be of primary importance for the decision to maintain high levels of domestic production and to dedicate some of this production for export. At this moment the U.S. is producing 9.2 million barrels per day, still showing moderate increases in spite of declining prices. West Texas oil prices are at around $27.30, about $4 lower than Brent prices, which are at $31.53.  This differential will most probably be maintained in the mid and long term.

In recent meetings of Venezuelan, Russian and Saudi oil ministers to look for ways to boost oil prices, the Venezuelan oil minister proposed important oil production cuts, a strategy that has worked in the past.  This time both the Russians and the Saudis refused.  The Saudis claimed that a production cut would result in a loss of markets, currently awash in supplies from OPEC and non-OPEC sources. In particular the entry of Iran into the market will add more than a million barrels per day to the global supply. Oil company executives still hope that this surplus will be minimized in the mid-term, allowing prices to increase to around $80 per barrel by the end of this year.  British Petroleum has advanced such a possibility in its annual Energy Outlook report. Their base case scenario suggests that fossil fuels, including oil, would still account for 80 per cent of all the world's energy needs by 2035, therefore keeping oil prices with a tendency to increase in the longer term.

Oil logistics within North America

The export-import balance within North America is the product of complex complementarities. Across Canadian, U.S. and Mexican borders, movement of crude oil and products is determined largely by factors such as its quality, regional location, transport availability and costs, and distance to those refineries that can generate optimum yields from each type of oil. The U.S. has traditionally exported significant daily volumes of crude oil to Canada, currently some 300,000 barrels per day, since Canada has always been exempted from the ban. Canada, in turn, exports about 3 million barrels per day of different types of oil and bitumen to the United States. These are exchanges that take place for logistical reasons and cannot easily be replaced by the utilization of just any type of U.S. domestic oil to replace Canadian imports. Similar considerations apply to Mexican-U.S. interchanges. Mexico is the third largest exporter of oil to the U.S. but now it has begun to import about 100,000 barrels per day of light U.S. crude oil in order to feed its refineries.

U.S. refining capacity

The amount of U.S. production that domestic refineries can handle is limited. They seem to be approaching the volumes of light crude oil they can absorb efficiently.  Much of the refining capacity in the country has been designed for heavier imported crudes. Increasing the diet of domestically produced lighter oil to these refineries would result in a less than optimum performance for many of them. “ There's a mismatch between the new production we're developing as an industry and our country's existing refining capacity, ” states Ryan Lance, ConocoPhillips Chairman and CEO. “ To process this new, lighter oil, refineries would have to operate inefficiently or at a reduced rate.”

It seems clear that increasing oil production in the U.S. of a quality not easily refined domestically will result in an increasing need for the exports of this type of crude. The type of light shale oil being produced in the U.S. would be of great benefit to Asian and, particularly, to European refineries, since it would produce maximum yields of gasoline and diesel.

Another issue relates to the oil storage capacity existing in the U.S. Declining domestic demand has meant increasing storage of stranded oil, as producers are reluctant to stop producing because this is expensive and technically risky. Once shut in, wells never seem to be able to produce at the same optimum manner after being re-opened. A recent EIA report states: “At 487.4 million barrels, U.S. crude oil inventories remain near levels not seen for this time of year in at least the last 80 years.” Although some storage capacity has been added recently, it cannot keep up with the demand. Such a situation increases the pressure for significant exports of U.S crude oil.

The geopolitical angle

Exports of significant volumes of U.S. crude oil to Europe could have a major impact on the European energy equation, chronically over dependent on Russian natural gas. U.S. crude oil available for export is high quality oil, which could strongly contribute to minimizing this dependence. There is no need to emphasize the benefits of receiving energy supplies from a friendly source.

A study by the EIA ,reveals that:

  • petroleum product prices in the United States, including gasoline prices, would be either unchanged or slightly reduced by the removal of current restrictions on crude oil exports; removing restrictions on U.S. crude oil exports either leaves global prices unchanged or lowers them modestly;
  • global price drivers unrelated to U.S. crude oil export policy will affect growth in U.S. crude oil production and exports of crude oil and products whether or not current export restrictions are removed.

In summary:

The alternatives open to the country are basically exporting some of its increased production or to apply this new production to minimize and, eventually, to eliminate import requirements. It would seem that U.S. exports of crude oil, at this moment in time, will be more beneficial in almost all respects to the overall U.S. economy and national interest than trying to replace oil imports with the new domestic production.

 

 

Gustavo Coronel /Selous Foundation / March 9, 2016



ISSUES.... 03/ 14 / 2016 - Send Us Your Issues

ISSUES.... Inside, confidential and off the record
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