US refiners hunting for heavy sour crude

Updated 14 September 2012

US refiners hunting for heavy sour crude

LONDON: Soaring domestic output of light low-sulphur crude has paradoxically increased US refiners’ appetite for imports of medium and heavy sour crude.
Refiners are increasingly blending plentiful light sweet crude from US shale fields like North Dakota’s Bakken and Texas’ Eagle Ford with much heavier and cheaper imported oil to cut crude acquisition costs while maximizing the desired output slate of valuable products.
The result is that rising domestic oil output is changing not only how much the US imports from abroad but also the type of oil it buys and the source countries.
According to the Energy Information Administration (EIA), the statistical arm of the US Department of Energy, crude imports fell almost 12 percent between 2005 and 2011, from 3.696 billion barrels to 3.261 billion.
Ethanol blending has cut total demand for petroleum-derived gasoline sharply since 2005. But imports have fallen faster than refineries’ total crude consumption, which dropped by just 150 million barrels or 2.7 percent between 2005 and 2011. In effect, the rise in domestic crude output has backed out an equivalent amount of formerly imported oil.
However, not all imports have been affected equally.
The most obvious impact has been to lower imports of the sort of light sweet oils that compete head on with those produced in the Bakken and Eagle Ford. Imports of crude with an API gravity of between 35 and 45 degrees (which matches oil produced from the Bakken) have fallen almost 260 million barrels per year (32 percent) since 2007 (Chart 2).
The result has been a big drop in imports from African light crude producers like Nigeria (down by 30 percent or 127 million barrels between 2005 and 2011), Angola (down by 27 percent or 46 million barrels) and Algeria (25 percent or 44 million barrels).
Imports of intermediate crudes, with an API between 25 and 35 degrees, have also shrunk by 278 million barrels per year (19 percent).
But less well-known is that refiners’ appetite for heavier, sourer crudes has been surging. Imports of heavy crudes, with an API of 25 degrees or less, have actually risen by 185 million barrels (14 percent) since 2007.
Refineries use complex linear programming systems to optimize their crude oil purchases based on the relative costs of different crudes and the yields of different products.
Heavy crudes (which tend to have more sulphur as well) are cheaper but harder to refine and yield more distillates and residual fuel oil unless they are intensively processed using catalytic cracking and coking units.
Light crudes (which often have less sulphur) are simpler to refine and yield more gasoline, but normally trade at a significant premium.
The aim is to buy the cheapest slate of crudes which will yield the most valuable slate of products. In order to achieve that, most refineries buy several different types of crude oil and blend them together before feeding them into the distillation units.
Refineries can be divided into three main areas: crude oil operations, where crude is unloaded from tankers and pipelines into settling tanks and mixed; production, where crude is fractionated by distillation; and product blending, where the various distillation fractions are mixed into commercially saleable products such as gasoline and diesel.
Each type of crude is initially unloaded into a separate set of storage tanks and left there to settle out the brine.
The various crudes are then transferred by pipeline and blended in charging tanks from which they are fed into the initial atmospheric distillation unit.
Crudes are mixed in the charging tanks to optimize the overall acquisition cost, as well as the refinery’s own operating configuration, and the current demand for various different end products.
The massive coking refineries along the US Gulf Coast are among the most advanced (“complex“) in the world, equipped to handle some of the most challenging crudes and maximize the output of valuable gasoline and middle distillates like diesel, while minimizing or eliminating the production of poor quality residual fuel oil which has to be sold at a discount.
Gulf refiners have had to cope with several simultaneous changes in both the crude and product markets.
On the product side, the traditional preference for maximizing gasoline output has been replaced by a need to maximize diesel. As a result, refineries’ demand for heavier, diesel-rich crudes has been increasing, replacing some of the demand for lighter, gasoline-laden oils.
Product specifications have also been tightened, with a big reduction in the amount of sulphur permitted in finished diesel for road and maritime use. Refineries must either buy lower-sulphur crudes or install expensive hydrotreating units to remove it from the crude and product streams.
Unlike their counterparts on the East Coast and Europe, Gulf refineries have invested heavily in new units to strip out unwanted sulphur and break up the larger molecules in medium and heavy crudes into lighter saleable molecules suitable for gasoline and diesel blending, which has given them a significant cost advantage.
But the sudden upsurge in light low sulphur crudes from Bakken and Eagle Ford has upset the system in a number of ways.
By providing a low-cost source of low sulphur crude it has thrown a lifeline to the smaller, older East Coast refineries.
However, it has also changed the economics of the more complex refineries along the Gulf Coast. It allows Gulf refiners to import an increasing volume of heavy crude to maximize their diesel output and make full use of their superior processing economics, while cutting it with light sweet Bakken and Eagle Ford oil to maintain an overall balance in the refining process.
Rather than just backing out imported light sweet oil barrel for barrel, production from Bakken, Eagle Ford and other shale plays is altering the entire crude slate US refineries seek to buy internationally, increasing their appetite for heavy crudes to blend with it to maintain diesel output and make best use of their investment in expensive upgrading equipment.
 — John Kemp is a Reuters market
analyst. The views expressed are his own.


Saudi Arabia looks to cut spending in bid to shrink deficit

Updated 01 October 2020

Saudi Arabia looks to cut spending in bid to shrink deficit

  • Saudi Arabia has issued about SR84 billion in sukuk in the year to date

LONDON: Saudi Arabia plans to reduce spending next year by about 7.5 percent to SR990 billion ($263.9 billion) as it seeks to reduce its deficit. This compares to spending of SR1.07 trillion this year, it said in a preliminary budget statement.

The Kingdom anticipates a budget deficit of about 12 percent this year falling to 5.1 percent next year.

Saudi Arabia released data on Wednesday showing that the economy contracted by about 7 percent in the second quarter as regional economies faced the twin blow of the coronavirus pandemic and continued oil price weakness.

The unemployment rate among Saudis increased to 15.4 percent in the second quarter compared with 11.8 percent in the first quarter of the year.

The challenging headwinds facing regional economies is expected to spur activity across debt markets as countries sell bonds to help fund spending.

Saudi Arabia has already issued about SR84 billion in sukuk in the year to date.

“Over the past three years, the government has developed (from scratch) a well-functioning and increasingly deeper domestic sukuk market that has allowed it to tap into growing domestic and international demand for Shariah-compliant fixed income assets,” Moody’s said in a statement on Wednesday. 

“This, in turn, has helped diversify its funding sources compared with what was available during the oil price shock of 2015-16 and ease liquidity pressures amid a more than doubling of government financing needs this year,” the ratings agency added.