Port Arthur, TX is home to the US refining fleet’s crown jewel. With an atmospheric distillation capacity of 603 MBbl/cd, this complex coking refinery is the largest refinery in the US. As of May 1st, this marvel of a complex refinery is now 100% owned by Saudi Aramco.
Saudi Aramco upped its 50% ownership in the Port Arthur refinery, which it previously held through the Motiva Enterprises JV with partner Royal Dutch Shell following the decision to disband the JV in early 2016. Along with the giant refinery, Saudi Aramco also acquired ownership of a number of distribution terminals and rights to sell Shell branded gasoline in a number of East Coast states and the eastern half of Texas. This move is an important one, even for a state owned behemoth like Saudi Aramco.
Saudi Aramco now owns approximately 300 MBbl/d more of the US domestic refining capacity. This means that Saudi Arabia now has the ability to send more of its own crude into the US refining fleet, making the volume of “sticky” imports (those crude oil imports that are difficult to replace due to contractual obligations or foreign ownership stakes in refineries) higher than it was previously. Saudi Arabia is already the second largest source of US crude imports behind Canada. According to the EIA, the US imported 1.34 MMBbl/d from Saudi Arabia in February.
Paired with the distribution terminals and rights to sell Shell branded gasoline, it is also a strategic move on the part of Saudi Aramco to capture the value add from refining and distribution in the US. Saudi Aramco also acquired the value of optionality: They can create additional demand for their own crude or decide to buy advantaged feedstock from US or Canada if they wish to take advantage of any arbitrage opportunities in the market. In effect, this refinery creates a market share luxury for them.
At this point, it is prudent to talk about the US refining fleet as a whole and what possibly lies ahead. US production has reversed its declining trajectory and is expected to post healthy growth moving forward, acting as the swing producer that OPEC (and in particular, Saudi Arabia) once was. The US currently has 18.2 MMBbl/cd of refining capacity. Assuming an average long-term refinery utilization rate of 90%, the effective capacity of the fleet is 16.4 MMBbl/cd. Canadian imports (~3.5 MMBbl/d) will continue to make their way into the US refining fleet due to the lack of Canadian refining capacity, the tooling of the US refineries (lending itself well to heavy crudes), and the need to refine heavier crudes in conjunction with the lighter grades to meet the mid and heavy distillate demand for refined products. Additionally, there is ~1.3 MMBbl/d of “sticky” crude imports that will continue to make their way into the US. This brings the effective refining capacity available to US domestic crude production to 11.6 MMBbl/cd.
Using DI ProdCast, given the Drillinginfo price forecast, US production will reach the 11.6 MMBbl/d level before the end of 2019 (Figure 1). As US production grows, the expectation will be for the domestic volumes to push out more imports and to continue to make their way into the global market. According to the EIA, in February, US crude oil exports reached an all time high level of 1.12 MMBbl/d. As US production grows, more and more volumes will have to find a home in the global refinery fleet.
Figure 1 – US Production vs. Effective Refining Capacity (Source: DI ProdCast)
Neither the pushing out of additional imports or higher exports from the US will be easy to achieve. US shale production is much lighter than benchmark crude oil grades and this is the portion of production that is growing. Most of this crude oil can be classified as ultra light (42-50°API) or as condensate (50+°API). These lighter crude oils do not fit as well into the complex refinery tooling of the US fleet. The US fleet is well suited to handle heavy, sour crude oils. Thus, as these lighter crude oils continue to grow in terms of volume and make their way in to the slate, they can cause inefficiencies and sub-par economics due to the product slate that they generate. Lighter crude oils usually yield more gasoline-level refined products, which are not as valuable as the distillate-level products that are the most valuable part of the mid and heavy grade barrels. Refiners will discount lighter crudes to make up for the opportunity cost of refining this type of crude and foregoing the optimal feed slate.
Producers who see steep discounts for their lighter crude oils would likely aim to take these barrels abroad, where they may be a better fit for the less complex refinery fleet of other regions. However, it is prudent to note that even these refining centers are not used to the light crude oils from US shale (global crude oil slate is heavier than the ultra light and condensate production in the US). Thus, these barrels will not be a perfect fit abroad either. Additionally, the variability of shale crude will be new to refiners abroad, who are used to the consistent quality and composition that comes with grades produced from conventional reservoirs. Shale crudes from the same basin and play can differ greatly in terms of chemical composition. This implies that the ultra light and condensate quality shale crude oil will likely be discounted by both domestic and foreign refineries.
Refinery slates, economics, and refined product demand patterns will be important to track, as these will shape the general crude oil market as well as the crude oil differentials amongst grades moving forward. Saudi Aramco, with their newly held 100% ownership of the Port Arthur, TX refinery will be in a prime position to use their refining capacity to suit their purposes. They can:
- Import Saudi crude grades into the refinery to keep their US import market share, in effect forcing US production to find a home elsewhere in the global refining fleet.
- Import Saudi crude grades into the refinery for processing and sell the added value refined products to US or global consumers.
- Take advantage of proximity to discounted US and Canadian feedstock to generate optimal refinery returns while keeping the option of exploiting arbitrage opportunities for their crude oil production open.
In short, the market share luxury and optionality that comes with having an expanded integrated oil and refining operation will provide Saudi Aramco with value for years to come under any crude oil and refined product price scenario.
Photo courtesy of The Center for Land Use Interpretation