The U.S. shale boom unleashed vast supplies of crude that pushed North American refineries to full throttle, but flat global demand and a surge of new refinery expansions in the Middle East could put the squeeze on their profits.
The drilling renaissance that flooded the market with light oil helped transform the U.S. into a net exporter of refined products. U.S. refineries are running near capacity and the nation now exports 10 times as much gasoline, diesel and distillate as it did four years ago, according to a new report from Moody’s Investors Services.
Shale oil will continue to give U.S. refineries a cost advantage over their European peers — crude is a refiner’s largest expense — but a few big refinery expansions in Saudi Arabia will steal some U.S. market share, the Moody’s report found.
Saudi Aramco and Sinopec are ramping up production on the new Yanbu refinery with a capacity of 400,000 barrels per day, and production has reached full capacity at the new similarly sized Jubail refinery, a joint venture between Saudi Aramco and Total.
A 417,000-barrel-per-day refinery expansion planned by the Abu Dhabi National Oil Company will start operations early next year, Moody’s said.
Related: Saudi Aramco a “force to be reckoned with” in chemical industry
The new large, complex refineries, designed for exports, will replace some U.S. exports, particularly to Europe, the report found. They could also force the closure of some European refineries, which have been battling higher priced feedstocks and more stringent regulations.
Related: U.S. petrochemical renaissance sows worry in Europe
U.S. refineries are also expanding and upgrading, investing in retrofits that would allow them to take advantage of the crude pumped from domestic shale plays.
Domestic refineries are primarily geared to run heavy, sour crude, mostly imported from Venezuela and Mexico, but many have started blending light shale oils into their feedstock, which has helped wean them off foreign oil. Gulf Coast refiners have slashed their imports of light crude from 1.6 million barrels per day in 2007 to 200,000 barrels per day in July, according to Moody’s.
Despite a surge of new domestic crude, Gulf Coast refiners will likely continue to import heavy oil because sweeping reconfigurations of the refining industry are “prohibitively expensive,” Moody’s found.
Related: Shale boom weans U.S. from foreign oil, creates new opportunities
North American refiners should expect to see their earnings remain relatively flat next year as they face new competition at home and abroad to export more refined products at a time when the world’s hunger for petroleum and other liquids is expected to grow only modestly, Moody’s found.
Global demand for petroleum and other liquids is projected to increase by 1.24 million barrels per day next year, a sluggish uptick that reflects slowing growth in China and flat demand in Brazil and India, the report found.
Against this backdrop, the best-positioned U.S. refining companies are those with plants near lucrative shale plays, including Alon USA Partners’ Big Spring refinery near the Permian Basin in West Texas and Calumet Specialty Product Partners’ San Antonio refinery, not far from the Eagle Ford Shale in South Texas.
But refiners must also continue to figure out ways to bring their products to market, giving an advantage to large refining companies like Valero, Phillips 66 and Marathon Petroleum that have access to export infrastructure, the report said.
Moody’s expects that North American refiners will continue to invest in pipelines, railcars, barges and storage that will help them carry crude from the oil patches to refining plants to export centers. Phillips 66, for example, is building a 4.4 million barrel per month export terminal for butane and propane in Freeport.
Share this: