The boom in production of super-light liquids from US shale oil projects and the loss of traditional light crudes from Africa is creating a global mismatch of refining capacity which could further exacerbate the impact of overcapacity in the industry, Barclays Capital analyst Amrita Sen said Friday.
The surge in output of US oil and natural gas liquids with over 50 API comes at a time when most US refining capacity additions have been geared towards heavy, sour crude, Sen told an oil conference in London.
Unless US producers are allowed to export the new light sweet shale crudes in coming years, a glut of the grades will see price premium for light/sweet crude narrow "significantly" over the next few years, Sen said.
"This is a real challenge for the US refining sector going forward," Sen told the Platts Crude Oil Markets conference. "Once you see light crude differentials compressed, all the billions of dollar investments you've spent on coking capacity suddenly becomes a bit worthless."
In January, the US Energy Information Administration estimated that shale production will help boost US crude oil production by more than 20% to 6.7 million b/d in 2020 from 5.5 million b/d in 2010.
Although rising crude output from offshore Gulf of Mexico fields will also remain a key growth driver, some analyst are more bullish over the growth of US shale oil which will also deliver significant volumes of natural gas liquids.
Including the NGLs, US liquids production could grow by almost 2 million b/d to some 9.4 million b/d in 2015 as the country's surging number of tight oil projects begin to ramp up production, according to recent estimate by energy analysts Wood Mackenzie.
EUROPEAN PAIN
In Europe, however, crude supplies are becoming heavier and sourer as the traditional light grades averaging around 30-40 API from Nigeria, Libya and the North Sea begin to plateau or decline, Sen pointed out.
Despite a significant amount of upgrading capacity within Europe's refining industry in recent years to meet an ever growing demand for diesel, the region's largely simple capacity remains biased towards gasoline production.
Indeed, average European crude grades are seen falling to around 34 API by 2020, down from 36 API in 2010, as declining volumes of North Sea crudes are replaced by greater volumes of Russia's heavier Urals blend, Sen said.
"Globally we are losing out in terms of crude quality...the good stuff, as we've known it, -- the light, sweet barrels from Libya and Nigeria -- that's not where production is growing," Sen said.
"Instead we are gaining super-light crudes and there's a limit to how much you can spike within a refining system with that," she said. "America wants Ural-like crude but they are getting shale...there is a big mismatch in terms of the quality of crude versus the refining capacity globally."
As a result of the mismatch, the dire refining margins being suffered by European players and many East Coast US refiners could be exacerbated by the need to source more costly crude from further afield, she said.
With falling demand for fuel, rising environmental cost and surging rival refining capacity in the Middle East and Asia, Europe's beleaguered downstream industry will likely face even greater pressure to shut more plants as a result of the new crude slates, she said.
Last week, the International Energy Agency estimated that global surplus refining capacity could reach around 6 million b/d by 2016 unless more refineries are shut down or current plans for new plants are not scaled back.
In addition, even US refiners able to process greater volumes of the super-light shale grades will likely see their margins constrained by the rising costs of liquids from the developments, Sen said.
The cost of many US shale oil developments are "going to stay high," she said, with many projects already based on assumed oil prices of at least $90/b to remain profitable.
