Shale Gas, Refining Boon

Before crude from the Bakken, the Eagle Ford, and other liquids plays made it into U.S. pipelines and refineries, hydraulic fracturing and horizontal drilling technologies were directed at natural gas production. The economic benefits of shale gas in the utility and chemical industries have been featured in the press. But another U.S. industry is profiting from both shale gas and shale oil—the U.S. refining industry.

In a new report titled “Refining Unconventional Oil—Unconventional Resources Invigorate A Mature Industry,” Hart Energy Research analyzed the interdependent regional impacts of rising unconventional crude oil volumes that are poised to move (or not move) through legacy U.S. crude oil logistics to the nation’s existing regional refining fleets.

Hart also found large demand for low-cost U.S. shale gas in energy-intensive U.S. refineries.

New upstream resources are concentrated in geographic areas not ideally aligned with the U.S. refining fleet anchored along the Gulf Coast. The resultant advantages (or disadvantages) further downstream vary by location.

By 2016, new shale and tight-oil producers and midstream operators will have redrawn the U.S. crude oil map, with over 9 million barrels per day (MMb/d) of crude pipeline projects, 54 crude-by-rail terminals adding 4.5 MMb/d of coast-to-coast deliverability, and nearly 40 million barrels of new Gulf Coast crude oil storage capacity. If all that crude were delivered and stockpiled regionally, the rush could remake the Gulf Coast into the “Cushing Coast.”

On the gas side, the U.S. was once projected to rely on liquefied natural gas (LNG) imports. But thanks to the shale-gas revolution, the country may become a top-tier LNG exporter.

Hart’s study of the integrated U.S. energy value chain analyzed the impact of supply surges in both unconventional commodities. It found that regional refinery fleet performance varies not only by crude acquisition costs but also with natural gas cost and demand.

Light crude oil refiners on the East and West coasts do not have effective access to discounted inland domestic crudes. They are at a relative competitive disadvantage because they refine costlier imported crude.

Similarly, shale gas has also yielded nonuniform benefits across the U.S. refinery industry. Refineries demand material volumes of fuel to heat and distill crude, generate steam and power, upgrade fuel, and more.

The study found that light crude refiners (e.g., along the East Coast) use far less energy than those producing clean fuels from lower-cost heavy crude (e.g., West and Gulf Coast refiners). Also, industrial gas prices vary by region.

Taken together, proximity to shale gas and adequate infrastructure furnished Gulf Coast refiners with the lowest energy cost per barrel of refined crude in the country. Hart’s analysis of 2010 data showed that Gulf Coast refiners paid an average gas bill of $2.02 per barrel refined—less than half the West Coast’s $4.69-per-barrel cost.

Higher global landed costs of LNG show that U.S. refiners clearly have a relative competitive advantage versus global refining competitors that rely on LNG for fuel. But others lack access to LNG and must burn even costlier petroleum-derived fuels. Hovensa and Valero Energy cited these disadvantages when they idled plants in the Virgin Islands and Aruba, respectively. Two similarly fuel-disadvantaged Hawaiian refineries are slated for sale or idling.

Conversely, accessing discounted Marcellus shale gas is among the first initiatives for Philadelphia’s refinery, according to The Carlyle Group, which recently acquired a stake in the plant from Sunoco.

As shale oil yields obvious U.S. refining industry advantages, these benefits are further amplified by less-obvious refining advantages underpinned by U.S. shale gas. A competitive U.S. refining sector buying both shale oil and shale gas benefits upstream producers selling both.