ECF ’16: US refiners turn focus to CDU projects over desulfurization

By Ben DuBose
Digital Editor

GALVESTON, Texas -- While US refineries are still competitive globally, new US crude exports will likely prevent large discounts on domestic oil in the future and could make heavy Canadian crudes more attractive, according to the senior analyst of refining and oil markets at consultancy Wood Mackenzie.

Speaking Tuesday at the second annual Energy Construction Forum, Afolabi Ogunnaike outlined the factors pointing to a reduced discount on US crude for the foreseeable future. In turn, that is helping prompt refiners to seek out more flexibility from their crude slates.

"Improving pipeline infrastructure and declining US oil supply have reduced the discount on US crude," he said. "We're unlikely to see large discounts on US oil again, as exports now provide a relief valve."

In fact, Ogunnaike expects a slight premium for US-based West Texas Intermediate (WTI) crude, relative to the global Brent benchmark, by the third quarter of 2016. By 2017, WTI and Brent will be largely in sync, he predicts.

In 2013, Ogunnaike estimated the value of discounted North American crude to US refineries at $32 billion, with over 55% coming from US light crude supplies derived from the shale boom. However, new pipeline projects and the ability to export oil could limit the availability of some of that light oil for the US refining industry in the years ahead.

That does not apply, however, to heavy Canadian oil -- which is still discounted. Though the overall value of discounted North American crude will shrink to $6 billion in 2017, Ogunnaike forecasts, the proportion of heavy Canadian crude in that discount will rise from about 45% in 2013 to near 70% in 2017.

Because of this market inefficiency, this is creating an economic boom for refineries with access to that Canadian oil -- particularly those in the US Midwest and Rocky Mountain regions, where pipeline access to Canadian crude is easily available, he said.

Looking forward, the vast majority of US refining investments between 2015 and 2019 will come within crude distillation units (CDU), Ogunnaike predicts. That runs in contrast to investments between 2010 and 2014, when desulfurization and cracking projects led the way, largely driven by government policy changes.

In fact, the Wood Mackenzie analysts believe some project cancellations are possible within cracking investments, as the industry shifts its focus to CDUs and processing new light crude and condensate supplies.

In closing, Ogunnaike noted that the recent boom in refining margins was because oil supply growth outpaced logistics. However, in recent times, improved logistics systems have caught up to the supply and are now reducing many of those discounts.

As a result, an emphasis on CDUs and handling "opportunity crudes" is likely the best path forward.

The second annual 
Energy Construction Forum continues through Wednesday at Moody Gardens.

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