The Texas Gulf Coast will be ground zero for a push to equip refineries to handle a flood of light crude unlocked in the U.S. shale boom, but the investments will be relatively conservative, a petrochemical consultant said Wednesday.
Refiners won’t spend the big bucks they dropped when they retooled to handle heavy, high-sulfur crude several years ago, largely because it’s cheaper and simpler to modify a refinery to process lighter crude, said Jim Jones, senior vice president at Dallas-based petrochemical consulting firm Turner, Mason and Company.
“It won’t be a $5 billion investment, it will be a couple million dollar investment, which is still big outside of the refining world,” Jones said.
Refiners have been scrambling to figure out how to process domestic crude that’s lighter grade than the heavier hydrocarbons typically imported from overseas, but they are primarily spending money on smaller projects to retrofit, upgrade or expand existing facilities, Jones said.
“They are going to be much more lower investment, much more targeted at doing just enough to make some products that can be exported,” Jones sad. A decades-old ban on exporting most U.S. crude does not apply to refined products.
Much of this investment has centered on Gulf Coast refineries because transporting crude to the East and West coasts remains costly. A dearth of east-west pipelines means crude must be shipped by tanker or rail, at costs that trim refiners’ profits, Jones said.
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Abundant supplies of cheaper domestic crude won’t prod companies to build expensive new refineries, which are subject to lengthy permitting processes and construction schedules that can stretch four to five years, Jones said. It’s also unlikely that companies will completely overhaul existing refineries and abandon heavy crude processing, he said.
“There’s still very good margins to be had just converting heavy crude,” Jones said.
Instead, refiners will adopt the same restrained approach they’ve historically taken, choosing to spend as little as possible to be able to process the light crude into a product that can be shipped overseas, Jones said.
“Refiners are slow to invest in new refining capacity,” he said. “They’ve been bit so many times building too much capacity and… get no return on their investment. They are not real eager to overspend yet.”
Most crude exports have been banned under laws that arose during Middle East oil embargoes in the 1970s that led to gasoline shortages in the United States. But the government recently allowed two companies to export an ultralight variety of oil known as condensate with minimal processing.
To be able to sell condensate overseas, companies must run the oil through a distillation tower, where it is heated and separated into different streams, a process that’s considered more intense than simply stabilizing the condensate for travel down a pipeline.
The decision by the U.S. Commerce Department’s Bureau of Industry and Security opens the door for refineries to sell condensate overseas by making relatively minimal adjustments to existing refineries. These modifications can be built more quickly – 18 months in some cases, depending on the permitting process — and more cheaply than erecting an entirely new refinery, Jones said.
Still, Jones said that future refinery investments will hinge on how the bureau defines and interprets the distillation process, which will happen on a case-by-case basis. That’s a decision that will be influenced by politics, not engineers, Jones said.
“To some people, it was, ‘Yippee, we get to export crude oil by doing very little,’” he said. “But I just want to emphasize that this is still all politics and still all policy. And as we know all rules and all laws are subject to change.”
While most of the investment is happening within refinery gates, some midstream companies have joined the rush to process light crude, undertaking projects to handle oil pumped from the Eagle Ford Shale in South Texas, Jones said.
By the nature of their financial structure — many are master limited partnerships exempt from corporate taxes — these companies tend to be more nimble than refiners at investing quickly in new projects, said Sandy Fielden, managing director of Houston-based energy analysts RBN Energy.
Pipeline giant Kinder Morgan Inc., for example, is building a $360 million mini-refinery on the Houston Ship Channel that will split condensate into different components, including naptha, kerosene, diesel and gas oil. The first unit is slated to come online in the fall.
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