The crude export debate has brought with it a conversation surrounding domestic refiners’ ability to handle the growing U.S. oil supply. Given this debate, AFPM released yesterday a third-party survey of U.S. fuel manufacturers. It found that U.S. refiners have more than enough processing capacity for the increased influx of light sweet crude oil over the next few years. Survey respondents represent a majority of U.S. refining capacity.
AFPM has long maintained it does not oppose crude oil exports. As an association that embraces free market principles, AFPM believes the export debate is an opportunity to look at multiple barriers to trade and advance a holistic energy policy, rather than legislating in silos as Congress had tended to do throughout history. The association also believes facts, not fiction, should dictate the debate. Despite this position, a coalition of upstream producers organized under the banner of Producers for American Crude Exports (PACE) attacked AFPM’s survey based on an assumption listed in footnote three. A PACE spokesman issued the following statement (via Politico Pro):
“By their own admission, this survey was designed to support a talking point that refiners can process all the oil currently being produced in the U.S.,” the PACE spokesman said. “However, don’t confuse this survey for an economic or scientific analysis. If refiners had the capacity and interest to refine all the light oil being produced in the U.S., we would not have a glut of crude oil, storage wouldn’t be at 80-year highs and refiners wouldn’t be exporting light crude to Canada by tanker for processing.”
Unfortunately, PACE did not take adequate time to read what the footnote actually referenced and, in doing so, failed on the facts. The survey was broken into two parts. The first part asked respondents to report what plans they have in place through the end of 2016 to absorb more light crude. The responses reflect contracts signed and steel in the ground, based on economic decisions that have already been made. In other words, this part of the survey did not need to place economic assumptions into the question because the companies have already decided these investments are worthwhile based on existing market conditions. These are not hypothetical investments, they are already happening, and the survey showed that the respondents plan to run 730,000 barrels per day (bpd) more very light crude from tight oil production in 2016 than they did in 2014. EIA’s latest forecast for 2016 projects U.S. lower 48 crude production to increase 610,000 bpd— meaning existing investments will be more than adequate to absorb the increased domestic production. In fact, a recent presentation from ConocoPhillips CEO Ryan Lance included a graph verifying the results released yesterday:
The second part of the survey asked respondents to make two assumptions in an attempt to identify the outer-reach capability of the industry by the end of 2016. This was the basis for footnote three. The survey asked companies if infrastructure were not a hurdle and the economics were favorable, what could they conceivably handle. That number added an additional 800,000 bpd (on top of the 730,000 bpd already planned) of potential if refiners had access to crude and economics permitted, for a total of 1.5 million bpd. Crude access is an important factor, because our domestic infrastructure is still not fully capable of delivering new domestic production increases to everywhere it could be used.
Reading the two numbers together was meant to provide bookend estimates, with the first number showing actual plans based on current investment and the second number showing what could happen if access issues were alleviated and economics were favorable. Given the fact the survey did not include investments planned post-2016 and almost 40 percent of the refining industry did not participate, these are very conservative numbers and plans to run light sweet crude likely exceed the survey’s results by large volumes.
In relation to PACE’s point on storage, there certainly are record levels of crude in storage, but that is largely driven by 1) soft demand relative to supply globally (not just domestically) and 2) the fact that the market is currently in contango, meaning the future price of oil is higher than the current price. Historically, when a futures market is in contango, commodity storage becomes more attractive, as the future price of delivery exceeds the current sales price. Furthermore, first quarter is when U.S. refiners do much maintenance, and demand for crude oil is seasonally low. Refining inputs have been running about 1 million barrels lower than they were in December and early January. That is changing as refiners come out of maintenance and begin to ramp up for summer demand.
There are many valid reasons to debate the merit of lifting the crude export ban, as well as several other market inhibiting regulations, such as the Jones Act and the federal biofuel mandate (RFS). Despite PACE’s inability to accurately read the results of our survey, the facts present the reality that refiners’ existing plans will generate more than enough capacity to handle projected increases in domestic crude production. AFPM welcome’s the crude export debate and hopes the members of PACE join refiners in the cause of advancing a truly holistic approach to free market energy policy, rather than attacking factual information presented by potential allies.