U.S. Oil Industry Becomes Refiner to the World as Exports Boom

[thackney]

U.S. Oil Industry Becomes Refiner to the World as Exports Boom
https://www.bloomberg.com/news/articles/2017-03-06/u-s-oil-industry-becomes-refiner-to-the-world-as-exports-boom
March 5, 2017

...the U.S. refining industry has shifted its game over the last five years, taking advantage of gaps left by struggling refiners in Latin America, Africa and Asia. Along the way, it’s transforming what had long been a largely domestic business into a new global venture.

"U.S. refiners are now the refiners for the world," said Ivan Sandrea, head of Sierra Oil & Gas, which is planning to build infrastructure to import U.S. fuels into Mexico.

U.S. companies last year exported a record 3 million barrels a day of refined products, more than double the 1.3 million barrels a day shipped a decade ago, according to data from the Energy Information Administration. Gasoline led the surge, with exports hitting an all-time high of almost 1 million barrels a day in December, up ten-fold from a decade ago.

The export boom, together with surging domestic shale oil output, has redrawn the global energy map.
The U.S. a decade ago reported annual net imports of crude and refined products of 12.4 million barrels a day. Last year, it received a net 4.8 million barrels a day, the lowest since 1985. In late 2016, the U.S. exported more crude and refined products to Latin America than it imported from the region -- a first.

The industry is embracing the new overseas fuel markets....

Mexico is emblematic of the shifting landscape. The Latin American country relied on U.S. gasoline last year for nearly 50 percent of its total consumption as refineries operated by state-owned oil giant Petroleos Mexicanos (Pemex) malfunctioned. In December, Mexico imported a record high of 1.2 million barrels a day of U.S. fuels, particularly gasoline.

While Mexico is an example of the strong overseas demand for U.S. fuels, it also represents the danger American refiners face longer term. Mexican fuel demand isn’t booming, which means U.S. refiners are merely filling a gap left by domestic inefficiency.

If Mexico’s own refining plants make some recoveries, the U.S. business there could end as quickly as it started.

"You’ve got to be careful about what you describe as demand," said Thomas Olney, an analyst at Facts Global Energy, a consultancy. "In effect it’s just that domestic production has been struggling," he said....

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Although many don't immediately recognize it as such, this is an area of expanding US manufacturing.  They take a raw product and produce a finished, higher value product.

[thackney]

4-Week Avg U.S. Refiner and Blender Adjusted Net Production of Finished Motor Gasoline
https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WGFRPUS2&f=4



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U.S. Refinery and Blender Net Production of Distillate Fuel Oil
https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MDIRPUS2&f=M



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U.S. Net Imports of Total Petroleum Products
https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MTPNTUS2&f=M

[IsailedawayfromFR]

To me, it seems counter-intuitive that the company economics favor taking in crude into US refineries and exporting refined product elsewhere.

Our higher labor costs, high relative corporate taxes and higher safety and environmental costs here in this country would seem to be a negative compared to setting up refineries in 3rd world companies to process crude.

What am I missing, a tremendous efficiency exponent that US refineries possess?

The only component which makes sense I guess is the much higher domestic and or Canadian crude availability since 2010 or so.

[thackney]

To me, it seems counter-intuitive that the company economics favor taking in crude into US refineries and exporting refined product elsewhere.

Our higher labor costs, high relative corporate taxes and higher safety and environmental costs here in this country would seem to be a negative compared to setting up refineries in 3rd world companies to process crude.

What am I missing, a tremendous efficiency exponent that US refineries possess?

The only component which makes sense I guess is the much higher domestic and or Canadian crude availability since 2010 or so.

Do you agree that other countries are not going to be importing it for any reason except cost?

Our higher labor cost must be offset by other factors or it would not be happening.

US refineries have lots of extensive capital investment to squeeze the most higher value products out of a barrel.  Units like coker are far more common in the US than around the world.

Also our more extensive refinery processes allow us to use cheaper heavy-sour oils, lowering our feedstock costs.

[Hondo69]

And there's always the export limits placed on the industry by Liberals to consider.

It only took a few decades for them to start to come around.

[Joe Wooten]

As long as PEMEX runs the refineries, I expect them to continue struggling to operate them efficiently. The corruption continues to get worse there as the Mexican "elites" continue to steal everything that is not completely nailed down.

[Weird Tolkienish Figure]

And there's always the export limits placed on the industry by Liberals to consider.

It only took a few decades for them to start to come around.

Didn't the GOP get that sole concession for some budgetary item a few years back?

I argued to other conservative types that it was worth it, they disagreed with me.


IMO we're now reaping the benefits.

[thackney]

Didn't the GOP get that sole concession for some budgetary item a few years back?

I argued to other conservative types that it was worth it, they disagreed with me.


IMO we're now reaping the benefits.

@Hondo69

Perhaps you are thinking of crude oil rather than refined product.

[Weird Tolkienish Figure]

@Hondo69

Perhaps you are thinking of crude oil rather than refined product.

My understanding was that the export ban was on crude oil only. Refined petroleum wasn't restricted.

[thackney]

My understanding was that the export ban was on crude oil only. Refined petroleum wasn't restricted.

Correct.  Perhaps I misunderstood your and Hondo69 comments on this thread discussing exporting refined products?

[IsailedawayfromFR]

Do you agree that other countries are not going to be importing it for any reason except cost?

Our higher labor cost must be offset by other factors or it would not be happening.

US refineries have lots of extensive capital investment to squeeze the most higher value products out of a barrel.  Units like coker are far more common in the US than around the world.

Also our more extensive refinery processes allow us to use cheaper heavy-sour oils, lowering our feedstock costs.

It is not just high labor costs, but also higher standards on safety and environmental that greatly increase costs.  Also, companies have to pay the US taxes, among the world's highest, if refined here.  If refined elsewhere, these are deferred, sometimes indefinitely.

There is something else going on I believe.  Just too much higher costs to overcome the better efficiencies.  Perhaps a higher attention paid on political risk, which I know are used when dealing in 3rd world.

[thackney]

It is not just high labor costs, but also higher standards on safety and environmental that greatly increase costs.  Also, companies have to pay the US taxes, among the world's highest, if refined here.  If refined elsewhere, these are deferred, sometimes indefinitely.

There is something else going on I believe.  Just too much higher costs to overcome the better efficiencies.  Perhaps a higher attention paid on political risk, which I know are used when dealing in 3rd world.

I don't see the spot market having a major political risk factor.  The efficiencies are significant.

While Mexico and Canada have large volumes, there are far too many small deliveries to many different countries to believe this is done above other economical choices.

Refined Products Exports by Destination
https://www.eia.gov/dnav/pet/pet_move_expc_a_EPP0_EEX_mbblpd_m.htm

[geronl]

A lot of profit and jobs to be lost with a tariff

[thackney]

A lot of profit and jobs to be lost with a tariff

Indeed.  Significantly raising the price of the oil used in a US refinery above the competitive prices in other nations will make this exported finished product uneconomical.

[thackney]

A lot of profit and jobs to be lost with a tariff

The top exports of the United States are:
Refined Petroleum ($103B),
Cars ($60.8B),
Planes, Helicopters, and/or Spacecraft ($53.2B),
Vehicle Parts ($38.4B) and
Packaged Medicaments ($38.1B)

http://atlas.media.mit.edu/en/profile/country/usa/

[geronl]

If Mexico built its own refineries and offered better rates to other countries, they could slice off billions of that export market

[Joe Wooten]

If Mexico built its own refineries and offered better rates to other countries, they could slice off billions of that export market

PEMEX is way too corrupt and inefficient for that to ever happen. Besides, they do not have the industrial capacity and engineering capability to design and build build their own refineries. The ones they are currently misoperating were built by foreign contractors with mostly imported equipment.

[thackney]

If Mexico built its own refineries and offered better rates to other countries, they could slice off billions of that export market

I used to work for a company that designed coker units for refineries (and other units).  PEMEX about a decade ago wanted to add a coker unit with a couple of vessels.  However, they were insistent on building the vessels on site with local labor, rather than the massive shipping charges for these very large and heavy walled vessels. 

for example:



After three years of trying to build and get past inspections of welds, etc they abandoned their effort, after spending almost double the cost of buying from a regular fabricator and shipping.  Then they let us hire it out and ship it in.  Effectively paying triple and a three year delay.

Typical of dealing with PEMEX.  Also we had to price in the ability to completely shutdown the design and inspection work to await payment, then request additional payment before starting the work up again.

[IsailedawayfromFR]

I don't see the spot market having a major political risk factor.  The efficiencies are significant.

While Mexico and Canada have large volumes, there are far too many small deliveries to many different countries to believe this is done above other economical choices.

Refined Products Exports by Destination
https://www.eia.gov/dnav/pet/pet_move_expc_a_EPP0_EEX_mbblpd_m.htm

Not the spot market I am referring to.

As an Economist for years, we graded projects in other countries with a numerical 'country risk' which sought to identify the risk to place capital into areas of political uncertainty, whether nationalization or terrorism or in some cases inordinate costs placed onto the project like forced usage of local labor or materials.  The latter led to some tremendous inefficiencies.

An example might be the USA have a 0% risk for investment whereas a place like Yemen might have a 50% risk, so projects in Yemen might have to yield a commercial attractiveness premium of 50% higher than a comparable project in US.

This was an attempt to quantify an intangible like political risk and incorporate into comparison economics among countries.

Your Pemex example illustrates this quantification of risk.

[thackney]

Not the spot market I am referring to.

As an Economist for years, we graded projects in other countries with a numerical 'country risk' which sought to identify the risk to place capital into areas of political uncertainty, whether nationalization or terrorism or in some cases inordinate costs placed onto the project like forced usage of local labor or materials.  The latter led to some tremendous inefficiencies.

An example might be the USA have a 0% risk for investment whereas a place like Yemen might have a 50% risk, so projects in Yemen might have to yield a commercial attractiveness premium of 50% higher than a comparable project in US.

This was an attempt to quantify an intangible like political risk and incorporate into comparison economics among countries.

Your Pemex example illustrates this quantification of risk.

Okay, you were not talking about the purchase of the finished product but the investment of capital for the refinery.

Those risks are costs.  Labor costs and regulations may be cheaper in Venezuela, but the actual cost to invest and get a return on your dollars is pretty dang high.

Not just inefficiencies and process then, but certainly a significant part of it.

We could even make the argument that political risk helped drive efficiency and process to compete with those in higher risk, lower labor pool environments.

[IsailedawayfromFR]

Okay, you were not talking about the purchase of the finished product but the investment of capital for the refinery.

Those risks are costs.  Labor costs and regulations may be cheaper in Venezuela, but the actual cost to invest and get a return on your dollars is pretty dang high.

Not just inefficiencies and process then, but certainly a significant part of it.

We could even make the argument that political risk helped drive efficiency and process to compete with those in higher risk, lower labor pool environments.

I also wonder if there is intelligence on tanker utilization, as perhaps there are some real cheap rates going on right now?  The reduced tanker need to bring crude here to US may have opened up opportunity to have those tankers used to export US refined products cheaply rather than remain idled?

Just musing.

[thackney]

I also wonder if there is intelligence on tanker utilization, as perhaps there are some real cheap rates going on right now?  The reduced tanker need to bring crude here to US may have opened up opportunity to have those tankers used to export US refined products cheaply rather than remain idled?

Just musing.

https://www.investing.com/indices/baltic-dirty-tanker-historical-data

https://www.investing.com/indices/baltic-clean-tanker-chart

While products can easily be changed on each journey of a tanker, noticeable expense is required to clean a tanker from crude oil use to refined product.

http://www.argusmedia.com/transportation/argus-freight/

Also keep in mind that over a decade, the tanker use didn't jump up.  It rather smoothly transitioned from bring products to the US, to taking them away.