Q&A ’15: Light, tight oil supply could drive US refining expansions

By Ben DuBose
Digital Editor

NEW ORLEANS, Louisiana -- The increasing availability of light tight oil (LTO) in the US is driving improved margins for domestic refiners and could justify further capacity expansions in coming years, according to an executive with KBC Advanced Technologies.

Ramon Loureiro, director and senior partner of consulting at KBC, delivered Monday's keynote address at the annual Q&A and Technology Forum in New Orleans. Mr. Loureiro explained to conference delegates why he's "more bullish" than some other industry analysts, with new LTO dynamics leading the way.

"In the coming years, I think you're going to hear the call on LTO, rather than the call on OPEC," he said.

Mr. Loureiro noted that upstream service costs for drilling have fallen substantially in recent years, ranging from estimates of 30% to as high as 50%. As a result, the favorable supply dynamics for refiners could linger for some time, even accounting for the impact that weaker global crude markets could have on upstream developers.

"Contractor labor, downhole pumps, cement costs and pressure pumping are all down," Mr. Loureiro said. "That can be 70% of costs."

Meanwhile, on the rig side, the availability and oversupply have reduced costs, as well. LTO producers are primarily drilling at "sweet" spots, and are also beginning to re-frack wells for further cost reductions. According to a recent Houston Chronicle report, only about 600 wells have been re-fracked of the 50,000 fractured since the beginning of the decade, leaving ample room for additional growth.

As a result of those dynamics, a study showed that, even with crude costs at $29.42/bbl, wells in the Bakken shale of McKenzie County, North Dakota could still generate a 10% return.

"For refiners, judicious lower-cost capacity expansions and refinery modifications may be justified to continue to capitalize on these LTO and export opportunities," Mr. Loureiro said.

Some analyst reports of late have claimed that global crude prices could fall as low as $20/bbl, which could discourage production even at lower-cost levels. However, the KBC executive does not believe prices will fall that low, owing to the higher prices required to support national budgets in leading Middle East economies.

While the development of LTO feedstocks is a positive for US refiners on the supply side, there are also favorable demand dynamics, Mr. Loureiro explained.

"US refined product exports really do supply the world," he said. "They're up 110% since 2005."

From a global standpoint, Mr. Loureiro cited an August report from the IEA that said demand for oil is increasing at its fastest pace in five years. Demand is now expected to grow by 1.6 MMbpd in 2015, representing an upward revision of 200 Mbpd from the IEA's previous forecast.

Likewise, OPEC has upgraded its oil consumption views for 2015. Consumption is now expected to grow by 1.38 MMbpd this year, which is some 90 Mbpd more than previously expected. Similarly, there has been a significant reduction in global crude stocks since April of this year, he said.

"Currently, demand is going up and stocks are going down," Mr. Loureiro said. "I have no doubt that prices will recover. The question is when."

For US refiners in particular, the key region to watch in terms of demand and exports could be Latin America. Mr. Loureiro, who joined KBC in 1986, helped the company's founders develop its Latin American business, and he sees significant opportunity there in the years ahead.

Demand for transportation fuels in Latin America is expected to rise to 10 MMbpd by 2020, but many of the planned new refinery projects in the region are either in the early stages of design or facing delays due to funding issues, he explained. That should provide ample opportunity for US refiners to export even more products to the region.

However, for US refiners to fully capitalize, the key will be adapting their refineries to processing LTO. The shale boom has made many cheap LTO feedstocks available, but not all refineries are prepared to process it, he says.

"LTO is an opportunity crude," Mr. Loureiro said. "It has a price advantage, but it also has significantly varying degree of quality. LTOs have better crackability, but poor reformability, and therefore lower yields. You have to design expansions for flexibility in crude processing, and you have to implement feed quality monitoring and practices to mitigate the impacts of varying quality."

Moving forward, LTO is expected to be the marginal producer, and US refiners need to include it in their crude-basket sourcing—because, for those who do not, their competitors likely will.

"Refiners that embrace advanced tools and enhanced competencies and systems will be able to respond to pricing and quality volatility, and be pace-setters," Mr. Loureiro said. "Meanwhile, other less-efficient refiners—perhaps a majority—will be the price-setters with lower operating margins.

“The choice is yours."

The annual AFPM Q&A and Technology Forum continues through Wednesday in New Orleans. Stick with Hydrocarbon Processing for continued coverage.

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