outlook
US Leads in Production But Needs to Add Refi nery Capacity
T
he US remained the world’s top producer of petro- leum and natural gas hydrocarbons in 2014, accord- ing to US Energy Information Administration (EIA)
estimates. US hydrocarbon production continues to exceed that of both Russia and Saudi Arabia, the second- and third- largest producers, respectively. For the US and Russia, total hydrocarbon production, in energy content terms, is almost evenly split between petroleum and natural gas. Saudi Ara- bia’s production heavily favors petroleum. Since 2008, US petroleum production has increased by
more than 11 quadrillion Btu. Despite the 50% decline in crude oil prices in the second half of last year, US petroleum production still increased by 3 quadrillion Btu in 2014. Natural gas production—largely from the eastern US—increased by 5 quadrillion Btu over the past fi ve years. Combined hydro- carbon output in Russia increased by 3 quadrillion Btu and in Saudi Arabia by 4 quadrillion Btu over the past fi ve years. While US production over the past several years is directly attributed to its exploitation of tight oil formations and shale gas, key factors acted to keep production from increasing in Russia and Saudi Arabia in 2014. Although Russian petro- leum production continued to increase, natural gas produc- tion declined because weak European economic growth and a warm 2013–14 winter reduced demand in Russia’s primary market for gas exports. While total petroleum and natural gas production estimates for the US and Russia in 2011 were roughly equivalent, by 2014 US production exceeded Rus- sian production by almost 12 quadrillion Btu. In the past, Saudi Arabia would raise or lower production to balance global markets. It did not cut production in late 2014 despite falling oil prices and growing global invento- ries. As a result, Saudi Arabia’s total petroleum and natural gas production was nearly unchanged from 2013. With the increase in US production, the US produced nearly twice the petroleum and natural gas as produced by Saudi Arabia in 2014.
With the growth in US production of light tight oil (LTO)
petroleum, US refi ners have been processing greater volumes of LTO. To date, this increase has mainly been accommo-
Linda Doman Mike Ford
Energy Information Administration US Department of Energy
dated with no- and low-cost options such as reducing light crude oil imports, increasing refi nery usage rates, making incremental effi ciency improvements, and displacing medium crude oil imports. A new EIA report reviews a range of ad- ditional options that US refi ners may consider to expand LTO 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 can have a greater overall cost but, given economies of scale, a lower per-barrel cost than smaller projects. However, larger projects also require a greater commitment to processing larger amounts of crude oil imports into fi nished 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 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, the complex facili- ties can process LTO into more refi ned petroleum products that generate more revenue and, possibly, better margins. Location—It is generally more expensive to build refi ning
units at greenfi eld sites than brownfi eld projects at an exist- ing refi nery. However, greenfi eld units can be built where ac- cess to markets is better and transportation costs are lower. Domestic processing of additional LTO would enable an
increase in exports from the US, already the world’s larg- est net exporter of petroleum products. Unlike crude oil, products are not subject to export limitations or licensing requirements. While this is a possible approach to accom- modating higher domestic LTO production in the absence of a relaxation of current limitations on crude oil exports, domestic LTO would have to be priced at a level to encour- age additional LTO runs at existing refi nery units, removing refi nery bottlenecks, or possible additions of capacity. The cost of such adjustments or capacity additions, together with the perception of market and policy risks surrounding poten- tial investments, will determine the extent to which LTO might need to be discounted to spur those investments.
29 — Energy Manufacturing 2015
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