“You Ain’t Seen Nothing Yet” – Outlook for U.S. Crude Exports

John Mayes and John Auers

We’ve seen a number of important new records set within the U.S. petroleum industry in the past 12 months, including crude production, refinery throughput, gasoline consumption, product exports, and crude exports.  Most, if not all of these, are related in one way or another to the shale boom, but are also impacted by a variety of other factors.  In today’s blog, we will discuss crude exports, the boom in which wouldn’t have been possible if exports restrictions weren’t removed by government action in late 2015. Prior to that action, the volume of exports was very modest and limited primarily to Canada, one of the very few allowable options under the old law.   During the initial post-export ban elimination period, export volumes remained well below 1 million BPD as domestic production stagnated because of the low price environment.  With the rebound in crude growth over the last year, they have grown rapidly, setting a monthly record of almost 1.8 million BPD in April (the last monthly data available) and a weekly record of 3 million BPD during the week ending June 22.  As exports headed ever higher, concerns about infrastructure limits have become very prominent, with no clear answers on what is the true “sustainable” export capacity.  The answer to this question has temporarily become less urgent as export volumes have fallen off in recent weeks, primarily as a result of the loss of 360 MBPD of light crude from Syncrude Canada’s upgrader outage and signs of slowing production from the Permian because of pipeline limitations.  Both of these issues will be resolved however and as strong North American crude production resumes, we can expect Bachman-Turner Overdrive (BTO’s) hit, “You Ain’t Seen Nothin’ Yet,” will be a very appropriate description of where U.S. crude exports are headed.  Substantial investment will be required to keep the oil flowing.  This will include both pipelines to deliver the crudes to the coast (primarily the Gulf Coast) and also new and expanded export facilities (terminals, docks, deepened channels, etc.) which can accommodate larger vessels to allow North American crude to compete in global markets.  We will examine this issue in today’s blog.

“And now I’m feeling better” – U.S. Production Growth Returns

Following a modest decline in 2016, U.S. crude production growth has once again begun to surge higher.  Fueled by rising oil prices, continued improvements in production efficiencies and the lifting of the crude oil export ban in December 2015, production rose steadily throughout 2017. Output in November of that year set a new record at nearly 10.1 million BPD, surpassing the previous record of 10.044 million BPD set in November 1970, 47 years earlier.  This growth has continued in 2018, hitting a monthly record of almost 10.5 million BPD in March and recently reaching a weekly record estimate of 11 MBPD.

The prognosis is for continued strong and steady growth in U.S. crude production (Figure 1).  Our current estimate is that output will approach 13 million BPD by 2020 and to exceed 15 million BPD in 2025.Nearly three-fourths of the forecast growth is expected to be from the Permian Basin (Table 1).  Output from the Permian will nearly triple in the next eight years and will comprise almost 44% of total U.S. output in 2025.  The projected increase of 4.2 million BPD dwarfs the next largest field increase of 660 MBPD from Eagle Ford.  The increases from the Permian, Eagle Ford and Bakken fields are almost exclusively light, sweet grades.  While production gains are also expected for the Bakken, Niobrara, and Anadarko fields, output from the Gulf of Mexico and the Other U.S. are expected to decline.  Forecast production growth for each region is shown in Figure 2.

“So I took what I could get” – U. S. Refining Growth

From 2010 through 2017, U.S. refineries increased crude processing rates by 1.9 million BPD.  Over this same period however, oil production growth was nearly 3.9 million BPD.  This imbalance was resolved by a combination of a reduction of crude imports (-1.3 million BPD), an increase in crude exports of 1.1 million BPD and inventory changes.

Even as the surge in shale oil production was altering the volumetric balance, it was also changing the quality of the crude being processed.  In recent years, refiners have been processing lighter and sweeter crudes (Figure 3), driven by the abundance of the light domestic grades.  Since 2010, average crude gravities have risen around 1.35 °API.  Average sulfur levels have been more consistent but have declined by 0.04 wt. % since 2014.

U.S. refining growth will continue to focus on the growing abundance of light, domestic grades, but the rate of growth is definitely slowing.  Since 2010, crude processing additions averaged 177 MBPD per year, but in the next five years growth will slow to only 33 MBPD per year for a total of 165 MBPD of expansions through 2022.  The bulk of the increases will be in PADD III (Table 2).  Assuming a 90% utilization rate, these capacity increases will only raise U.S. crude runs by slightly less than 150 MBPD.

“But I wanted it that way” – IMO Regulations Make U.S. Crude More Attractive

Because the forecast of U.S. refining growth is significantly less than the expected crude production growth, crude exports must increase to balance.  Normally, this would necessitate finding new markets for light crudes and forcing out existing suppliers; however, the advent of the International Maritime Organization’s bunker regulations in 2020 may solve this issue. The reduction in bunker sulfur levels was first announced in 2012, but the global refining industry has done little to prepare for the new requirements.  As a result, most fuel oil producing refineries are ill-prepared for the transition.  A likely response of many of these refineries will be to increase the processing of light, sweet crudes to reduce the volume of high sulfur fuel oil production.  This situation is likely to increase the global demand for light crudes and provide a ready market for incremental U.S. production.

Even in advance of 2020, foreign interest in U.S. crude has been robust.  The high light naphtha yields provide an excellent feedstock for Asian petrochemical facilities.  In 2017, China was the second largest importer of U.S. crude (only behind Canada) at 224 MBPD, while all of eastern Asia consumed one-third of U.S. crude exports.  Having already tested many of the U.S. grades, the region is well-positioned to increase crude imports from the U.S. in 2020.

“Woohoo, but I ain’t seen nothin’ yet” – The Inevitable Growth of Exports

Considering the expected strong growth, limited domestic refining growth, and the growing value of U.S. light crude in the global markets, we expect U.S. crude exports to increase to nearly 6 million BPD by the first half of the next decade (Figure 4).  This does not include increase in NGL output, which is also expected to continue to rise.

In the first four months of 2018, crude oil was exported from 12 ports on the United States Gulf Coast (USGC) (Table 3).  Corpus Christi had the greatest volume at 360 MBPD, while Houston was second at 326 MBPD.  These two ports, however, only comprised barely half of the region’s crude exports.  The other ten ports demonstrate the breadth and diversity of the existing logistics system.

To keep pace with the blistering rate of expected export growth however, it is apparent that field exit pipeline capacities and export terminal capacities must also be rapidly expanded.  This trend is, in fact, occurring; but whether it can keep up with the production gains, remains uncertain.

This subject is discussed in greater detail in the upcoming (early August) release of our 2018 Crude and Refined Products Outlook (C&RPO).  We detail many of the new pipeline and export terminal projects and compare the new capacities to the crude oil production increases.  These developments play an important role in our overall analysis of global and regional crude supply, demand and pricing, and are accounted for in the forecasts we make for each of these, which are included in the C&RPO.  For more information on this report or on any of our other analyses or consulting capabilities, please send us an email or give us a call.