US light tight oil: Is it really a demand problem rather than a supply one?
Date | 01 June 2020 |
DOI | http://doi.org/10.1111/opec.12176 |
Author | Roddy Graham,Pedro Antonio Merino Garcia |
Published date | 01 June 2020 |
US light tight oil: Is it really a demand
problem rather than a supply one?
Roddy Graham and Pedro Antonio Merino Garcia
Madrid, Spain. Email: rgraham@repsol.com Email: amerinog@repsol.com
Abstract
Production of Light Tight Oil (LTO), also known as “Shale Oil”, has grown quickly over the last
decade. The discussion regarding LTO has always been about supply and the ability of LTO
producers to continue to grow production over the coming years. Little has been written regarding
the demand for LTO and whether refineries can process this extra light oil. This analysis attempts
to start a conversation to determine how much light crude oil the global refinery system can absorb
and how much LTO can grow before there is oversupply.
1. INTRODUCTION
Data from the Energy Information Administration (EIA) indicate that between 2007 and
2018, US light crude oil production increased by around 5.9mbpd (U.S. Energy
Information Administration(f))). This increase was due to the development of light tight
oil (LTO) more commonly known as shale oil. The consensus LTO narrative forecasts
that LTO production will continue to grow significantly over the coming years
(International Energy Agency(e)). (Note: In this analysis, the terms light tight oil (LTO)
and light crude oil are used. They are not interchangeable. LTO is an unconventional oil
with light characteristics, while light crude oil describes all global oil with an API above
35 including LTO production.)
Nearly, all the analysis of future LTO growth has been made from the perspective of
production and supply rather than from the perspective of demand. It is typically centred
around the future production forecasts made by LTO production companies, efficiency
gains from technology improvements, falling production costs, etc. This bullish narrative
regarding LTO growth has seen several companies investing or preparing to invest in the
development of new takeaway pipeline capacity to increase exports. If all the propos ed
capacity is commissioned, then the United States could export up to 8.4mbpd
(International Energy Agency(b)) of LTO by the end of 2021. If the LTO producers
could fill that capacity, it would represent an export increase of 6.5mbpd over 2018
levels.
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This narrative therefore assumes that all future LTO growth will be easily absorbed
by the global refinery system despite the characteristics of LTO being significantly
different to those required by the average refinery.
The last major cycle of refinery investment began in the 1990s when industry
sentiment began to consider the possibility of ‘peak supply’for oil. This sentiment saw
oil producers begin to develop more unconventional sources of crude oil such as the oil
sands in Canada and the Orinoco Delta in Venezuela. The problem was that these areas
contained crude oil with very low APIs (high density), high viscosities and high levels of
sulphur and other contaminants. At the time, these were crude oils that most refineries
could not process. So, these heavy oils became extremely cheap in price, which induced
refiners to invest in the complexity and conversion capacity of their refineries to
maximise the refinery’s margin as they expected these crudes to be the source of future
growth.
In 2005, the International Energy Agency’s (IEA) Global Energy Outlook (Birol
2005) predicted that the average API of global crude would continue to fall between
2005 and 2030. Nobody foresaw the ‘shale oil revolution’would add a fresh source of
light sweet crude oil and a lightening of the crude oil slate. In fact, between 2010 and
2018 global light crude oil production has risen by around 8.0mbpd (ENI Spa). During
the same period, both medium crude oil production and heavy crude oil production have
increased by only 1.0mbpd (ENI Spa).
Despite this ‘shale revolution’and with LTO expected to be the future marginal
barrel, the refiners continue to invest in the complexity of their refinery to run more
heavy and sour crude oils including Hengli—a heavy crude oil to chemical refinery. This
suggests that refiners may have more limited demand for LTO than supply for LTO, if
the configuration of the refineries makes it difficult to process more crude oil. One reason
is that medium and heavy crude oils provide refineries more flexibility with product slate
they can produce allowing them to maximise the refinery margin when necessary.
Therefore, refinery design will be key to whether the narrative of increasing will
happen rather than to whether LTO producers can produce.
1.1. Refinery design may not permit continued increases in LTO production
An atmospheric distillation column (ADC) is a large tower or fractionator (Figure 1)
where separation occurs over multiple-separation stages (usually metallic trays) by way
of heat transfer through gas/liquid interaction. The objective of the ADC is to remove
major contaminants and provide an initial cut of the crude oil into its products or
fractions (e.g. naphtha, diesel) for further processing in the secondary units, for example
hydrocrackers.
Crude oil is preheated and partially vaporised before entering the ADC’sflash zone,
which separates the vapour (fractions) from the liquid (residue). Further separation
OPEC Energy Review June 2020 ©2020 Organization of the Petroleum Exporting Countries
116 GRAHAM and MERINO GARCIA
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