Introduction
Refining and oil demand
Discussion
Jan07 Jan08 Jan09 Jan10 Jan11 date
Jan12 Jan13 Jan14
-10 0 10 20 30 difference in Brent vs. WTI spot price
0
thousand barrels per day 1000 2000 3000
Recent Trends in US oil production
Bakken production Eagle Ford production increase in Permian basin oil production vs. Jan 2007 increase in Canadian imports vs. March 1999 increase in tight oil production vs. Jan 2007 difference in Brent vs. WTI spot price Crude Behavior (RFF-IB-14-03)
HERE roundtable
November 2, 2014
1 / 12
Introduction
Refining and oil demand
Discussion
Recent Trends in US gas production
Crude Behavior (RFF-IB-14-03)
HERE roundtable
November 2, 2014
2 / 12
Introduction
Refining and oil demand
Discussion
Employment Effects of Fracking
Crude Behavior (RFF-IB-14-03)
HERE roundtable
November 2, 2014
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Introduction
Refining and oil demand
Discussion
26
28
30
32
34
Average API gravity of imported oil
Jan1985
Jan1990
Jan1995
Jan2000 date
Jan2005
Jan2010
Jan2015
average specific gravity, imported crude oil average specific gravity, US refinery receipts
US refiners typically designed to accommodate heavier crude average API gravity of US oil has dramatically increased since 2010 link to expanded tight oil production Crude Behavior (RFF-IB-14-03)
HERE roundtable
November 2, 2014
4 / 12
Introduction
Refining and oil demand
Discussion
Heterogeneities in oil crude differs in sulfur content, API gravity sulfur must be removed before oil is refined higher API gravity ⇒ easier to produce higher-valued products
Crude Behavior (RFF-IB-14-03)
HERE roundtable
November 2, 2014
5 / 12
Introduction
Refining and oil demand
Discussion
Unique traits of tight oil Distillation Cuts for Condensate and Various Crude Oils 100
Percent
90 80
70 LPGs/NGLs
60
Naphthas/Gasolines
50
Middle Distillates
40
Vacuum Gas Oil Resid/Fuel Oil
30 20 10
0 Eagle Ford/55° Condensate
WTI/40°
Mars/29°
Maya/22°
° = API Gravity
Super light tight oil and condensates have significantly different product yields than conventional crudes
Source: Haverly Systems
7
Crude Behavior (RFF-IB-14-03)
HERE roundtable
November 2, 2014
6 / 12
Introduction
Refining and oil demand
Discussion
Tradeoffs in refining
lighter crude facilitates production of valuable products refiners can handle heavier crude by installing “cracking” capacity
expensive capital equipment all else equal, tend not to obtain such capital but if anticipate ongoing stream of heavy crude, the investment is economic once installed, there is an opportunity cost to moving output mix towards gasoline trade-off influenced by output prices (e.g., gasoline vs. diesel) trade-off also influenced by input prices refiners with access to underpriced lighter crude tilt output towards gasoline
alternatively, might look to purchase increasing amounts of heavy crude to offset influx of lighter crude
Crude Behavior (RFF-IB-14-03)
HERE roundtable
November 2, 2014
7 / 12
Introduction
Refining and oil demand
Discussion
30
API degrees 31 32
33
fraction capacity allocated to cracking .4 .5 .6 .7
34
Contrasting Midwestern and Gulf Coast regions (PADD 2, PADD 3)
29
2000
Jan2004
2005
2010
2015
year Jan2006
Jan2008
Jan2010
Jan2012
Jan2014
Date SG2
Crude Behavior (RFF-IB-14-03)
SG3
HERE roundtable
CrackCap_2 CrackCap_4 CrackCap_5
CrackCap_3 CrackCap_1
November 2, 2014
8 / 12
Introduction
Refining and oil demand
Discussion
Other considerations evidence that per-well production follows “hyperbolic decline curve”
subject to very rapid decline in first several months then production flattens out, falls much more slowly implication: aggregate field production likely to exhibit “peak load” issue incentive to have rolling frontier of development this can only be sustained for several years in very large fields implications for incentive to build/expand pipeline infrastructure alternative transport: rail (safety concerns)
Crude Behavior (RFF-IB-14-03)
HERE roundtable
November 2, 2014
9 / 12
Introduction
Refining and oil demand
Discussion
PADD2 oil sells at a discount, gasoline does not PADD2 refineries process lighter sweeter crude than PADD3 refineries
suggests acquisition costs should be higher in PADD3 than in PADD2, but...
Refiners’ Acquisition Cost (Composite)
Crude Behavior (RFF-IB-14-03)
HERE roundtable
Wholesale Gasoline Prices
November 2, 2014
10 / 12
Introduction
Refining and oil demand
Discussion
Heterogeneities in oil crude differs in sulfur content, API gravity
higher API gravity ⇒ easier to produce higher-valued products sulfur must be removed from oil during refining process increased sulfur content is bad, should lower price increased API gravity is good, should raise price
our regression analysis of data indicates
each 1 degree increase in API gravity raises average US refinery acquisition cost by $0.64/barrel each 1% increase in sulfur lowers average US refinery acquisition cost by $2.88/barrel based on average sulfur and API gravity in PADD2, US as a whole, our estimates imply PADD2 oil is underpriced by $6.34/barrel lower acquisition cost in PADD2, particularly since 2010 (undervalued) higher API gravity oil in PADD2 Crude Behavior (RFF-IB-14-03)
HERE roundtable
November 2, 2014
11 / 12
Introduction
Refining and oil demand
Discussion
Final thoughts Emerging trend towards tight oil has greatly expanded US crude oil reserves new output tends to be light oil
imperfect match to US refinery configuration motive for exporting crude
lifting crude expert ban will reduce market uncertainty
this will possibly motivate expansion of pipeline infrastructure ancillary benefit: shifting oil delivery away from rail to pipeline attendant reduction in delivery risks
likely increase in prices received by midwestern producers likely modest impact on gasoline prices likely reduction in gasoline prices sooner? (Larry Summers) later? (RFF analysis)
Crude Behavior (RFF-IB-14-03)
HERE roundtable
November 2, 2014
12 / 12
