US refineries fast running out of flexibility on crude

BY JOHN KEMP

(Reuters) - The United States imported more than 7 million barrels per day of crude oil during the first seven months of the year, despite the shale boom, according to the U.S. Energy Information Administration (EIA).

Crude imports have fallen from a peak of almost 14 million barrels per day in 2006, but they still account for almost half the barrels processed by U.S. refineries.

Some observers have expressed unease about lifting the ban on crude exports while the United States continues to rely on imports to meet such a high proportion of its needs.

“With regard to the oil export question, we are looking at that,” Energy Secretary Ernest Moniz said in an interview with Platts earlier this month. “But a very important point that is just not emphasized is we remain a very large importer of oil.”

The problem with looking at broad aggregates like this, however, is that not all crude oils are created equal. It is not possible to treat them all as substitutes for each other.

Crudes vary considerably in terms of density, acidity, type of hydrocarbon molecules they contain, and presence of impurities such as sulfur and heavy metals such as nickel and vanadium.

And refiners are very fussy about the quality of crude oil that they process. It is most definitely not the case that any old crude can be processed in any old refinery.

Too much acid or salt and the refinery’s equipment will be damaged by corrosion. Too many heavy metals and the catalysts will be poisoned. Too much sulfur and it becomes hard to meet specifications for finished fuels. And oil of the wrong density makes it impossible to maximize the efficiency of the refinery’s distillation tower and other units.

Most refineries handle a range of crudes by blending them to ensure the average quality stays close to target. They employ complex computer models to tell them which crudes to buy based on current crude and product prices, the refinery’s technical specifications and the desired blend quality.

But refineries only have flexibility within a fairly narrow range. Blended crude quality must be kept within tight quality limits.

Keeping average quality within operating limits means that U.S. refineries could struggle to process all the country’s domestic output long before imports fall to zero.

In fact, U.S. refiners could start running up against their operating limits in the next six to 12 months, even while the country is importing more than 5-6 million barrels every day.

OCEAN OF LIGHT OIL

In the case of the shale boom and U.S. oil trade, the key characteristic of the crude oil is its relative density or specific gravity.

The industry measures the density or specific gravity of crude using an arbitrary scale established by the American Petroleum Institute (API) and known as degrees API, which compares the density of oil to water at a specific temperature.

Water has a specific gravity of 10 degrees API. Extra heavy oils such as bitumen, which are denser than water, have a specific gravity of less than 10 degrees. Heavy oils, which are less dense than water, have a specific gravity of between 10 degrees and about 25 degrees. Medium crudes have a specific gravity between 25 and 35 degrees. Oils with a specific gravity of more than 35 degrees are known as light crudes.

Different organizations employ slightly different cut-off points between heavy, medium and light oils, but the difference is usually only a matter of a few degrees. In general, anything denser than about 25 degrees is classified as heavy oil, anything lighter than 35 degrees is light oil, and medium oils are those in between.

U.S. refiners have shown a strong preference for a medium blend. Since 1985, the average density of oil processed by U.S. refiners has been fairly steady and not varied much in the short term. In statistical terms, the weighted average specific gravity has been 31.1 degrees with a standard deviation of just 0.7 degrees (link.reuters.com/vuc23w).

The problem for U.S. refiners is that almost all the extra oil being produced as a result of the shale boom is much lighter than they would like.

“Roughly 96 percent of the 1.8 million barrels per day growth in (domestic) production between 2011 and 2013 consisted of ... grades with API gravity of 40 or above,” according to the U.S. Energy Information Administration (“U.S. crude oil production forecast - analysis of crude types” May 2014).

APPROACHING BLENDING LIMIT

If refiners had purchased and processed all the extra domestic oil without making adjustments to the other types of crude they buy, the specific gravity of the blend would have soared, making the refining process much less efficient.

Instead, refiners have held the average blend quality constant by substituting domestic crude for imported light oils, while maintaining imports of medium-heavy and heavy oils.

So while imports of medium-heavy and heavy oils (with specific gravity of less than 30 degrees) have remained roughly constant at 4.5-5.0 million barrels per day since 2007, imports of medium-light and light oils have shriveled from 6 million barrels per day to just over 2 million. (link.reuters.com/xuc23w)

Imports of the lightest oils, the closest substitutes for domestic shale production, have been slashed from 2.5 million barrels in 2007 per day to just 500,000 in the first seven months of 2014.

But with imports of light oil down to just half a million barrels per day, according to the EIA, refiners are running out of room to maneuver.

Imports from Nigeria, one of the principal sources of light crude, have already fallen from more than 1 million barrels per day in 2010 to zero in July 2014.

There is not much more room to accommodate rising domestic light oil production by backing out more imported light crude.

U.S. production from shale is currently rising by around 1 million barrels per day each year, so the blending limits of the refining system could be reached within the next year, possibly even the next six months.

Some analysts have suggested U.S. refiners could reconfigure their plants to handle a lighter average blend, but that would take time and involve costly investment.

It would also be dreadfully inefficient when the simpler option would be to permit crude exports and allow U.S. refiners to continue processing more of the heavier oils they prefer.

Secretary Moniz seemed to indicate the Obama administration would not permit crude exports while the country was still importing so much crude oil.

But with great respect, the total volume of crude is not relevant. What matters is the amount of light oil being imported, and on measure, U.S. refiners are running out of flexibility and the time to allow exports is drawing close.

(editing by Jane Baird)