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