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Light Tight Oil Growth Impact on Refined Products and Intermediates Rick Thomas

Light Tight Oil Growth Impact on Refined Products and Intermediates Rick Thomas. 2014 Energy Conference October 28, 2014. Overview. U.S. Light Tight Oil (LTO) Production The Industry’s Initial Response What Happens Next? How Will Refined Products and Intermediates be Impacted?.

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Light Tight Oil Growth Impact on Refined Products and Intermediates Rick Thomas

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  1. Light Tight Oil GrowthImpact on Refined Products and IntermediatesRick Thomas 2014 Energy Conference October 28, 2014

  2. Overview • U.S. Light Tight Oil (LTO) Production • The Industry’s Initial Response • What Happens Next? • How Will Refined Products and Intermediates be Impacted?

  3. US Crude Oil Production has increased significantly since 2010 US Crude Oil Production MB/D Source: EIA and Baker & O’Brien Analysis

  4. The Industry’s Response Increased Crude Runs Displacement of Crude Imports Increased Crude Exports Source: EIA

  5. The Industry’s Response (continued) Investment in Logistics Infrastructure Expansion of Product Exports Source: EIA Expansion of Domestic Refining Capacity Source: Baker & O’Brien Analysis

  6. How Much More LTO Can We Expect? • LTO production will continue to increase—but how much and how fast? Source: EIA. Incremental production is calculated using EIA‘s forecast for Lower 48 onshore crude oil production minus Q4 2013 actual production.

  7. What Happens Next? Assuming current crude oil export regulations…….. • We can expect a continued increase in crude runs as refiners fully utilize existing capacity and invest in new capacity. • 1.1 million B/D of new capacity announced. • Continued displacement of light crude oil imports and an acceleration in the displacement of heavier crude oil imports.

  8. U.S. Crude Oil Import Displacement Considerations • Imported crude oil accounted for 48% of U.S. refinery crude runs in Q4 2013. • Additional U.S. LTO production can be absorbed in part through displacement of imported crude oil. • Need to consider the composition of LTO relative to imported crude oil. U.S. Crude Runs = 15.5 Q4 2013

  9. Typical LTO Handling Constraints • Physical constraints to processing LTO vary by refinery but are generally centered around crude oil distillation and light ends handling. STILL GAS TO SATURATED GAS PLANT Light product cooling and hydraulics Saturated gas plant capacity Overhead hydraulics and cooling Naphtha treating and processing Crude column diameter * Note: “PA” = pumparound circuit Preheat train configuration Crude vaporization capacity Source: Petroleum Fractionation Overview, University of Oklahoma and Baker & O’Brien.

  10. Case Study: Replacing Medium Crude with LTO/Heavy Blend • Case Study: A 100,000 Bbl/day refiner of imported medium crude oil, constrained by the volume of naphtha and lighter material that can be processed. • As the proportion of LTO in a substitute LTO/Heavy blend increases above 40%, crude throughput declines and feedstock available for downstream conversion units declines. • Unit turndown constraints become a factor when downstream feedstock (VGO and heavier) falls to <70% of downstream capacity, suggesting 65% maximum LTO in the blend • Conversion units might be partially filled with atmospheric tower bottoms available from new condensate splitters Turndown Constraint

  11. Options for Replacing Medium Crude Oil with LTO • Direct substitution of medium crude oil with LTO: • Refiners would generally (although not always) need to sacrifice some throughput in order to substitute light for medium. • Some refiners are making investments to substitute light for medium on a barrel for barrel basis. • LTO/heavy blends can substitute for some medium grade imports: • Advantages: Enables refiners to maintain crude throughput and keep downstream units full. • Considerations: • Asphaltene precipitation • Crude oil blending facilities • Heavy crude oil availability • Product quality Blend

  12. U.S. Medium Crude Imports Mostly from Saudi Arabia Source: EIA

  13. Options for Replacing Heavy Crude Oil with LTO • As with medium crude oil, refiners would generally need to sacrifice throughput in order to substitute light for heavy. • Some refiners are making investments to substitute light for heavy on a barrel for barrel basis. • Blends of LTO with Canadian “rawbit” or “railbit” could substitute for some heavy crude imports: • Advantages: Enables refiners to maintain crude throughput and keep downstream units full. • Considerations: • Asphaltene precipitation • Crude blending facilities • Availability of rawbit and railbit • Possible high acid (TAN) constraints. Blend

  14. How Will Refined Products and Intermediates be Impacted? • U.S. production of refined product and intermediates will be influenced by a number of factors: • LTO production volume and timing • U.S. refinery capacity additions and timing • Crude oil and condensate export volumes • Availability of heavy crude oil and bitumen and logistics for bringing it to market • LTO absorption mechanisms chosen by individual refiners • Given these uncertainties, three scenarios for processing LTO were modeled.

  15. Implications for Refined Products • LPG, naphtha, and distillate production increase in all three scenarios • LPG will be processed in new petrochemical facilities and/or exported • Naphtha will be processed into gasoline and/or exported • U.S. reformers currently operate at ~ 75% utilization • Increasing demand for diluent in Canada • Distillates will be exported

  16. How More LTO Processing Affects the Bottom of the Barrel • The impact of LTO processing on atmospheric tower bottoms (ATB) production depends on the absorption mechanism chosen by individual refiners • ATB from LTO typically contains more VGO than the average U.S. crude • As a result, ATB from LTO can often be sent directly to upgrading units

  17. How LTO Affects the Bottom of the Barrel – Choose Your Scenario • In the short term, VGO and vacuum resid (VR) production may decline until condensate splitters and crude unit expansions come online • In alternative absorption scenarios, VGO and VR production could grow • There are almost 400 MB/day of VGO imports, and over 450 MB/day of heavy fuel imports that have the potential to be displaced

  18. Summary • US crude oil production has increased significantly since 2010 and is expected to continue to rise. • Refiners can be expected to accelerate the displacement of medium and heavy crude oil imports. • To the extent possible, refiners will blend LTO with heavier components to minimize refinery turndown limitations. • Refiners will exercise available short term and long term (capital) options for overcoming light ends limitations. • Light virgin products will exhibit year-to-year increases, but heavy virgin intermediates could decline in the near term before rising.

  19. Baker & O’Brien – Independent Energy Consultants www.bakerobrien.com

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