U.S. refineries running out of cheap ways to run light oil

U.S. refineries have done almost everything they can to cheaply process the light oil flowing out of domestic shale formations and will need to make bigger investments to continue raising capacity, a report says.

Refiners have modified units and are blending crudes to handle the influx of light oil supply from shale plays such as the Bakken in North Dakota and Eagle Ford in Texas, the U.S. Energy Information Administration said in a report Monday. With low-cost investments exhausted, they’ll have to rely on new unit installations if they want to run more shale oil, the report says.

“It does appear that we’re moving into a phase where additional investment, beyond de-bottlenecking, is necessary to move ahead,” Michael Schaal, director of the EIA office that produced the report, said by phone from Washington.

U.S. fuel producers are searching for ways to run more light oil as the shale boom drives the cost of domestic oil below global prices, giving them an edge over competitors abroad. The EIA is researching exactly how much the country’s refiners can process as oil producers including Continental Resources and ConocoPhillips lobby the U.S. government to send their crude abroad.

Schaal described the EIA’s report as a “puzzle piece” that the agency will use in the coming weeks to determine the limits of the U.S. refining complex in processing light shale oil. “We didn’t make that assessment in this report,” he said.

A 4-decade-old law restricting U.S. crude exports has kept most tight-oil supplies inside the country. Output of the grade surged to 4.5 million barrels a day last year, from 1.8 million a day in 2011, EIA data show.

With low-investment options exhausted, refiners will need to build new equipment to run more light oil, the EIA said in the report. The cheapest option would be a stabilizer, which boils off volatile gases from the lightest form of crude, known as condensate, making the oil processed and thus exportable. The capital costs for such a project, spread out over several years, may run anywhere from 63 cents to $1.16 a barrel.

Another option would be installing a splitter, or a crude unit designed for ultralight oil, for as much as $2.39 a barrel, according to the EIA report. Kinder Morgan just started one 50,000-barrel-a-day splitter in Houston and plans to bring another unit of the same size online this year.

Building a full “greenfield” refinery to turn ultralight oil into fuel would cost anywhere from $6.78 to $12.98 a barrel, the agency said.

“So we are clearly not saying that current production levels are the absolute limit for handling light, tight oil,” Schaal said. “What you can say is that building a greenfield refinery comes at a cost of $6.78 a barrel. And that’s a lot of money.”

This story was originally published April 6, 2015 at 3:50 PM with the headline "U.S. refineries running out of cheap ways to run light oil."