Recent and projected increases in U.S. crude oil production have sparked discussion about how current limitations on crude exports affect prices, including world and domestic crude oil and petroleum product prices, and the level of domestic crude production and refining activity.

Recognizing that refiner responses beyond like-for-like substitution of imported crude oils of the same quality are an important pathway to increasing the use of domestic crude by refiners much beyond the current level, EIA retained Turner, Mason & Company (TM) to provide an analysis of the implications of increasing domestic light tight oil production for the U.S. refining sector.

The TM analysis focuses on operational changes and investments in capacity expansion that domestic refiners would likely make to process increasing volumes of light oil. It considers two domestic production scenarios provided to TM by EIA, and two crude oil export policies (one reflecting current restrictions on crude oil exports, the other allowing unrestricted crude oil exports). The analysis covers the period from 2014 through 2025, using 2013 as the base year.

Three cases were analyzed:

  • Low crude production under current export restrictions
  • High crude production without export restrictions
  • High crude production with current export restrictions

A fourth case, low crude production without export restrictions, was also considered for analysis. However, results obtained for the low crude oil production case under current export restrictions found that domestic production volumes, which reach 10.9 million barrels per day (bbl/d) in that case, could be processed domestically without the need for significant capacity expansion after consideration of crude export opportunities available under current policies. TM found that current export policies did not cause the spread between domestic and global crudes to widen in the low production case. Based on this finding, TM determined that refining results would not materially differ between the low production case with current export limitations and the low production case without those limitations. For this reason, the latter combination of production and policy was not pursued as a separate case in the TM report.

In all three cases developed by TM, increasing domestic crude oil production leads to a decline in crude oil imports, an increase in refinery runs, new investments to expand refinery capacity, and higher crude and petroleum product exports. However, the magnitudes of the changes vary across the scenarios (Figure 1).

Low production case

In the low production case, by 2025, the U.S. refinery system accommodates 3.5 million bbl/d of incremental (relative to a 2013 baseline) light crude production by investing $1.8 billion in new, less-sophisticated processing units, i.e., splitters. This is in addition to the already-announced investment to expand and debottleneck existing capacity, some of which has been completed. A list of these announced projects is provided. The incremental production is absorbed by reducing crude imports by 1.5 million bbl/d; increasing refinery runs by 1.3 million bbl/d day; increasing crude exports by 0.4 bbl/d; and processing 0.3 bbl/d of crude in the new splitter units. The increase in crude runs at domestic refineries results in higher U.S. net exports of refined products, based on the assumption across all cases that U.S. refineries remain competitive in the global market. The price of U.S. crude West Texas Intermediate (WTI) does not change compared with the price of global benchmark North Sea Brent because the U.S. refining system does not require significant new capacity investments beyond that which has already been planned.

High production, current crude export restrictions case

In the high resource case and with no changes to current export restrictions, by 2025, additional processing capacity investment is required to help absorb 7.2 million bbl/d of incremental (relative to a 2013 baseline) domestic light crude production. An estimated $11.0 billion dollars is invested to expand U.S. processing capacity by 2.4 million bbl/d in the form of new stabilizers, splitters, and hydroskimming refining capacity, which combine distillation and basic upgrading units. This is in addition to the already announced plans to expand and debottleneck existing capacity. The 0.4 million bbl/d crude processing capacity expansions at existing refineries, combined with an increase in utilization, increases crude runs at existing refineries by 10% to 16.5 million bbl/d. By 2025, the increase in crude runs results in net refined product exports of 4.5 million bbl/d, an increase of 3.4 million bbl/d compared with 2013. Crude oil exports increase modestly, limited by the volume of U.S. crude that Canadian refineries can absorb, but crude imports decline by 37%. Imports of almost all grades of crude except heavy sour crude decline to zero. The price of WTI crude oil declines compared with Brent reflecting the price discount required to encourage incremental U.S. refiner investment needed to process higher volumes of light crude oil.

High production, current crude export restrictions case

In the high resource case and with no changes to current export restrictions, by 2025, additional processing capacity investment is required to help absorb 7.2 million bbl/d of incremental (relative to a 2013 baseline) domestic light crude production. An estimated $11.0 billion dollars is invested to expand U.S. processing capacity by 2.4 million bbl/d in the form of new stabilizers, splitters, and hydroskimming refining capacity, which combine distillation and basic upgrading units. This is in addition to the already announced plans to expand and debottleneck existing capacity. The 0.4 million bbl/d crude processing capacity expansions at existing refineries, combined with an increase in utilization, increases crude runs at existing refineries by 10% to 16.5 million bbl/d. By 2025, the increase in crude runs results in net refined product exports of 4.5 million bbl/d, an increase of 3.4 million bbl/d compared with 2013. Crude oil exports increase modestly, limited by the volume of U.S. crude that Canadian refineries can absorb, but crude imports decline by 37%. Imports of almost all grades of crude except heavy sour crude decline to zero. The price of WTI crude oil declines compared with Brent reflecting the price discount required to encourage incremental U.S. refiner investment needed to process higher volumes of light crude oil.

High production, no crude export restrictions case

When the high resource case is considered in a scenario without crude export restrictions, crude exports increase to 2.4 million bb/d in 2025. Domestic processing capacity also increases, but to a significantly lesser extent than in the high production case with current crude export restrictions, as $2.3 billion is invested to build 0.8 million bbl/d of new stabilizer and splitter capacity. More costly hydroskimming refineries are not built, because the ability to export crude oil prevents the price of WTI from declining to a level that would support such investment. Crude imports decline, falling by 36% from 7.8 million bbl/d in 2013 to 4.9 million bbl/d in 2025, as refiners make the same adjustments to back out light and medium crude imports as in the high production case with current export restrictions, run their refineries at high utilization rates, and process light oil through splitters.

Given its focus on refining, the TM report does not address all key questions related to the implications of crude oil export policy choices. Notably, it does not consider how the effect of crude oil exports policies on the spread between global and domestic crude prices could potentially affect the level of U.S. crude oil production. Other issues not considered include international market arbitrage on crude or products or a competitive analysis of international refining to support increased U.S. product exports. Some of these topics will be considered in forthcoming EIA reports.

U.S. average gasoline and diesel fuel prices increase

The U.S. average price for regular gasoline increased nine cents from the previous week to $2.66 per gallon as of May 4, 2015, $1.02 per gallon lower than the same time last year. The West Coast price increased 23 cents to $3.42 per gallon. The Rocky Mountain price rose nine cents to $2.57 per gallon, and the Gulf Coast price increased eight cents to $2.38 per gallon. The East Coast and Midwest prices both increased six cents, to $2.58 per gallon and $2.50 per gallon, respectively.

The U.S. average price for diesel fuel rose four cents from a week ago to $2.85 per gallon, $1.11 per gallon less than the same time last year. The West Coast price increased nine cents to $3.11 per gallon, followed by the Gulf Coast price, which rose seven cents to $2.75 per gallon. The East Coast and Rocky Mountain prices each rose three cents, to $2.98 per gallon and $2.76 per gallon, respectively. The Midwest price increased two cents to $2.72 per gallon.

Propane inventories gain

U.S. propane stocks increased by 1.8 million barrels last week to 66.5 million barrels as of May 1, 2015, 31.3 million barrels (88.7%) higher than a year ago. Gulf Coast inventories increased by 1.1 million barrels and East Coast inventories increased by 0.5 million barrels. Midwest and Rocky Mountain/West Coast inventories both increased by 0.1 million barrels. Propylene non-fuel-use inventories represented 7.4% of total propane inventories.