Redrawing the Global Oil & Gas Picture
May 8, 2018,
In less than a decade’s time, the enormous growth in U.S. oil and gas production, and promise of ongoing expansion has reconfigured world trade flow, with the effects of the watershed development still unfolding. The International Energy Agency recently projected the United States would become an undisputed world leader in oil and gas production, a turnaround from the doom and gloom predictions of peak oil.
The seismic shift is still in the early days as a U.S. infrastructure buildout continues to trail the explosion in upstream production, but the landscape has already undergone historic development in new capacity for pipelines and tankage. U.S. refiners are processing more crude oil then at any point in their history, while auto manufacturers are shutting down production lines for sedans and compact cars as low gasoline prices end a period of consumer transportation humility.
U.S. liquefied natural gas exports that were once limited to Alaska are on the cusp of extraordinary growth. The Center for Strategic and International Studies said the United States is in the early stages of a ramp-up in U.S. LNG exports, projecting the United States would have the third largest capacity of LNG behind Australia and Qatar by 2020 following the completion of current construction projects. BP expects the United States will become the top LNG producer by 2035 with 19 billion cubic feet per day of capacity, outpacing Australia’s output of 13 Bcf/d.
By 2035, BP expects net LNG exports from North America at 22 Bcf/d, with supply exported to South America, Europe and Asia, with other Asia net LNG imports surging to 44 Bcf/d. The trend is already underway, with Canadian natural gas production up 5.7% from 2016 to 2017 with U.S. output up 0.7%, according to IEA. Gas production in Mexico dropped 12.2% over the period amid aging fields and destruction caused by Hurricane Harvey in August 2017. An increasing supply of natural gas is being piped to Mexico from the United States.
In global oil trade, 24 countries are participating in production restraint as growth in U.S. oil output continues to reset the record high, now at 10.6 million bpd, with the Energy Information Administration forecasting production to average 10.7 million bpd this year. Led by Saudi Arabia, the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producing countries including Russia are now in the second year of a two-year agreement capping their output, with Saudi officials already discussing extending a production agreement in some form into 2019.
No longer the world’s top importer of oil, with that title now held by China, U.S. net imports of crude and oil products declined from a peak four-week average at 13.591 million bpd in November 2005 to end April at 3.295 million bpd per EIA statistics, a 76% decline and still falling. The United States is already a net exporter of oil products, and U.S. crude exports have averaged 1.6 million bpd during the first four months of 2018 compared with a 2017 average at 1.1 million bpd, with the export rate accelerating to more than 2.0 million bpd in late April.
The sharp acceleration in U.S. crude oil production and exports could be even faster EIA recently noted. “Although much of the current focus has been on pipeline constraints limiting the amount of crude oil that can reach the U.S. Gulf Coast, potential shipping limitations are also relevant,” analysts with the federal department recently noted. Despite these growing pains, U.S. exports of crude, gasoline, distillates, propane and even ethanol are expanding rapidly.
Domestically, oil trade has also been dynamic. This trend is most notable in PADD 2 crude and oil product deliveries and receipts with PADD 3, with the Midwest deliveries to the Gulf Coast surging 755 million bbl from 2009 to 899 million bbl in 2017 for growth of more than 500%. Over the same period, Gulf Coast deliveries to the Midwest have declined by 177 million bbl or 23% to 578 million bbl. PADD 4 deliveries to PADD 2 have also increased, up 225 million bbl to 331 million bbl from 2009 to 2017 that equates to growth of more than 200%.
The inter-PADD movements reflect upstream growth in North Dakota, as well as in Wyoming and Colorado, and increased delivery of Canadian crude oil that prompted a significant expansion in pipeline capacity, with the Seaway Pipeline reversal and pipeline twinning a notable example. Crude by rail movements bridged the gap between growing oil production in North Dakota until pipeline capacity increased, with Canadian producers now increasing crude by rail shipments as they contend with pipeline constraint amid public opposition by British Columbia.
New Tank Capacity Comes to Market
Also enabling this expansion has been a surge in new tankage, a critical component that allows suppliers to forward position product closer to market, as well as managing output near production locations and pipeline interconnections.
From September 2011 to September 2017, U.S. refinery, tank and underground net available shell storage capacity surged 196.261 million bbl or 35.3% to 752.105 million bbl, according to EIA. Most of the capacity additions have been made in the PADD 3 Gulf Coast region, where available tankage expanded by 112.084 million bbl or 37.9% to 407.598 million bbl.
In the PADD 2 Midwest, tankage capacity grew by more than 50%, up 74.055 million bbl to 211.065 million bbl. At the Cushing tank farm in Oklahoma, which is the underlying delivery location for the New York Mercantile Exchange West Texas Intermediate crude futures contract, net available shell tank storage capacity expanded by 26.053 million bbl or 39.2% from September 2011 to September 2017 to 92.456 million bbl.
Since serving as the delivery location for WTI futures, the U.S. price crude benchmark, market participants closely watch storage changes at Cushing, which has an inbound pipeline capacity of 3.0 million bpd. Fourteen pipelines deliver crude to Cushing, and 16 pipelines are outbound.
Growing Refinery Outlook
U.S. refining capacity has expanded sharply as well during the 10-year period through 2017, climbing 1.2 million bpd or 6.4%, with the growth realized despite lost capacity along the Atlantic and Pacific coastlines. That’s a sizable increase in capacity driven primarily by expansions along the PADD 3 Gulf Coast, where refinery additions added 1.4 million bpd or 16.9% from 2007 to 2017. Gulf Coast has the most sophisticated and competitive refining operations worldwide.
In the PADD 2 Midwest, refinery capacity gained 411,000 bpd or 11.4% to 4.006 million bpd during the period profiled, while up 213,000 bpd or 13.6% in the PADD 4 Rockies Mountain region. These expansions have occurred as refiners take advantage of lower cost regional supplies, with Midwest capacity also boosted to take advantage of increased deliveries of heavy crude oil from Canada.
In contrast, refiners along the coasts have rationalized their processing capacity, with East Coast refiners in particular dependent upon crude oil imports. A wide WTI discount to Brent crude, with the futures contract trading on the Intercontinental Exchange, offered an incentive for refiners in Philadelphia, Pa., New Jersey and Delaware to rail in crude from as far away as North Dakota. However, the arbitrage window narrowed significantly, diminishing the trade.
PADD 1 East Coast refining capacity declined by 402,000 bpd or 27.3% from 2007 to 1.071 million bpd in 2017. For the PADD 5 West Coast, refining capacity shrunk by 213,000 bpd or 7.6% over the term to 2.578 million bpd.
Total U.S. oil product supplied to market averaged 20.5 million bpd in 2018 through late April per EIA data, outpacing their forecast for consumption to average 20.38 million bpd this year, with the government statistical and analytical division projecting the growth rate in domestic consumption to climb to 20.7 million bpd in 2019. Strengthening U.S. demand after several years of weakness is generated by robust economic growth as well as the abundance of oil that has benefited the United States economically and geopolitically. The dramatic reduction in imports is reaping enormous reward for U.S. businesses and consumers alike, while the increase in supply availability through lower cost U.S. exports benefit the global community and provide greater choice in deciding upon business partners.
Read this article in Tank Storage Magazine.