re: As US Permian crude turns lighter, it risks losing favor with refiners

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I'm not a petroleum guy, but could we blend the heavy oils with the light shale to run it through our current refineries? Also, if light, sweet shale oil is what we're going to have the bulk of going forward, the companies are probably just going to have to transition their equipment to handle it.

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I think this reflects a fairly common misunderstanding of why refineries want to run heavy crude. The crude oil market is global. In theory, a given refinery can source crude from wherever they want. It’s not really about availability, it’s about economics.

Generally speaking, transportation costs are higher for imported crude than domestic crude. Not 100% of the time, but generally. It’s much cheaper to transport oil via pipeline than over water via tanker.

Additionally, it requires more energy to refine heavy crudes into finished fuels than light crudes. The same applies to sour crudes, as the sulfur has to be removed. Heavy/sour crudes also require additional capital investment for a given fuel production capacity, due to the additional process equipment required.

When you couple all of this with the fact that domestic shale production is mostly light & sweet, it’s easy to say “well we need to build the right kind of refineries.” But there’s another factor: heavy and/or sour crude oils are cheaper than light, sweet crude oils. As long as that “discount” for heavy crude is greater than the additional refining & transportation costs, it makes perfect economic sense to run heavier crude assuming you have the ability to do so.

Refining margins are extremely tight. It’s a competitive industry. So every refinery is trying to run the most profitable crude slate that they can handle given their specific infrastructure. The specific blend of crude input changes over time based on economics - if the price for one specific source (for example, Brazilian high-acid crude) goes up, they’ll start looking for a discount elsewhere. And depending on the market outlook, they may choose to undergo some capital projects so that they can achieve a deeper discount relative to their competitors.

It’s a constant game of optimization. So if the discount/differential between light and heavy crude gets small enough that it no longer offsets the added costs (and is therefore no longer an “opportunity”), this will eventually lead refineries to build out more atmospheric distillation capacity so that they can run more light crude.

TL;DR: If it were cheaper/more efficient to run light crude, US refiners would be doing it already.

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We need heavy from somewhere and preferably not the ME.

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Plenty of heavy rude in the Canadian oil sands. It would be easier to get down to the gulf coast heavy crude refineries, but only if the pipeline was completed.

Would be curious to see a cash flow diagram of cost to upgrade/change out equipment so it can handle light crude vs keeping as is. If it's cheaper to process lighter stuff you might see some refineries changing their operations.

All that is very interesting.

Reuters running cover for crude buyers

"Hey brah it's another -$1.00 to MEH this month"

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Which one?

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This one highlighted below.

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A proposed fourth pipeline, called Keystone XL (sometimes abbreviated KXL, with XL standing for "export limited"[18]) Pipeline, would have connected the Phase I-pipeline terminals in Hardisty, Alberta, and Steele City, Nebraska, by a shorter route and a larger-diameter pipe.[19] It would have run through Baker, Montana, where American-produced light crude oil from the Williston Basin (Bakken formation) of Montana and North Dakota would have been added[12] to the Keystone's throughput of synthetic crude oil (syncrude) and diluted bitumen (dilbit) from the oil sands of Canada. It is unclear how much of the oil transported through the pipeline would have reached American consumers instead of being exported to other countries.[20]

The pipeline became well known when the proposed KXL extension attracted opposition from environmentalists with concerns about climate change and fossil fuels. In 2015, KXL was temporarily delayed by President Barack Obama. On January 24, 2017, President Donald Trump took action intended to permit the pipeline's completion. On January 20, 2021, President Joe Biden signed an executive order[21] to revoke the permit[22] that was granted to TC Energy Corporation for the Keystone XL Pipeline (Phase 4). On June 9, 2021, TC Energy abandoned plans for the Keystone XL Pipeline.[23][24]

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Would have been nice to have those heavy oil sands crude flowing down from Canada on the Keystone XL blending with the west Texas lights to maximize refining capacity. Oh well. Hopefully Trump wins and TransCanada can restart Keystone XL.

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It’s a constant game of optimization. So if the discount/differential between light and heavy crude gets small enough that it no longer offsets the added costs (and is therefore no longer an “opportunity”), this will eventually lead refineries to build out more atmospheric distillation capacity so that they can run more light crude.

TL;DR: If it were cheaper/more efficient to run light crude, US refiners would be doing it already.

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It is also a game of profit centers. If all you think about is gasoline, jet fuel and diesel, you've already lost. The major conversions of major refiners in TX and LA from light and intermediate to heavy was all about the petcoke market. It's not like very heavy and heavy grades from Venezuela and Mexico were not around before the early 1980's. It's that cokers once used just to squeeze the last light ends out of the residual, became a profit center in the early 1980's as new markets were developed for petcoke. Suddenly, cokers units were installed, and existing coking units expanded, not because crude was cheaper if very heavy or heavy but because it made more money.

Then there is asphalt to consider. Technically speaking, asphalt is like tar and after blending with aggregate it is called asphalt concrete (but we still call it asphalt) Refineries making asphalt don't want any of this tight shale crude.

BTW, the percentage of tight shale above 50 API gravity seems to be more than publicly stated. Many sources of if have high paraffin wax content which is surprising for how light it is. It's not easy on pipelines having to be constantly pigged due wax buildup. Many wells never got more than $40 per barrel as a result. I am presently working with a technology company which has developed new tech to drop the pour point of these waxy "crudes"

I know of a few inland refineries having issues with having to use more and more tight shale such as Utica, Permian and Eagle Ford due other domestic sources declining, even after condensate splitters ahead of the crude unit. The condensate splitter removes light ends (gas entrained) ahead of the crude unit. So many light ends will vapor lock the crude fractionation column if run at full capacity if not pre-processed in this way. Marathon's refineries in Canton, OH and El Paso, TX are having problems with making asphalt from increased use of tight shale and it is affecting their bottom line already.

As to more energy and more capital investment for heavy crude, this is also for more profit centers.

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The only decent supply of heavy is in California but after over a century of production it is depleting fast.

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Depleting and no new permits can be granted so you will not see much activity out of that state. Once those lines get too low that state will just shut down production.