Light Sweet Crude and Refineries: An Overload in the Making

An article excerpt: “Refiners, including Shell/Pemex, Lyondell/CITCO, Exxon Mobil, and Valero, spent billions of dollars in the 1990s, as domestic light,  sweet crude production declined. They modified refineries to process heavy, sour crude from sources including Mexico (Maya), Venezuela (Orinoco), and Saudi. Pemex, CITCO (Venezuela), and Aramco (Saudi Arabia) formed joint ventures with refiners in the Gulf Coast in the 1990s to secure refinery outlets for their poorer quality crude.

It would cost hundreds of millions to convert a refinery back to sweet service, and the EPA is unlikely to approve a permit for a new US refinery.

A glut will occur of light, sweet crude oil and condensate produced from the Eagle Ford, Wolfcamp, and Leonard-aged formations that include the Bone Spring, Spraberry, and Avalon. The price at the wellhead in the Permian will likely be $10-30 per barrel below that of Brent crude, the new global benchmark for oil prices. The price of Brent or WTI Cushing will be irrelevant to Permian or Eagle Ford producers, as it will take discounting (a price war) to induce an oversupplied sweet refinery to take one producer’s crude over another’s.

There are at least three market-based solutions to this quandary. One, the federal government should lift its ban on exports of crude oil. There are simple, “tea kettle” refineries in Mexico and other Central and Latin American countries that would buy our sweet crude if permitted to do so. We, in turn, import heavy, sour Latin crude to be processed in our complex Gulf Coast refineries. This amounts to a crude swap with our Latin neighbors. Two, refiners invest billions in the aggregate to convert their refineries back to sweet service. The impediment to this strategy is the fact that most of the incremental oil to be developed outside the U.S. is heavy sour, whose producers are willing to discount and enter long-term contracts to sell it. Three, prices fall into the $70s or worse at the wellhead and the investment and the rig count drops, reducing oil production, alleviating the problem.

But lower oil and gas prices mean lower cash flow and reduced rates of return on investment, thus reduced reinvestment, and slower production growth. It is a brutal self-correction mechanism that none of us hopes to resort to.

Finally,check with your friendly natural gas marketer or gas gathering and processing company, your power distribution company about ordering a meter and service to your new location. Finally, permitting times on saltwater disposal wells are six months out at the Texas Railroad Commission, so investigate both your water disposal and sourcing in advance. If any of these are not prepared in advance, your multi-million investment may sit idle until products can be gathered and sold, power can be delivered, and water sourced and disposed.

Source: Light Sweet Crude and Refineries: An Overload in the Making

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