{"id":637,"date":"2013-03-26T04:11:36","date_gmt":"2013-03-26T09:11:36","guid":{"rendered":"https:\/\/allenergyconsulting.com\/blog\/?p=637"},"modified":"2014-02-04T16:28:38","modified_gmt":"2014-02-04T22:28:38","slug":"refining-in-the-21st-century-part-1-contd","status":"publish","type":"post","link":"https:\/\/allenergyconsulting.com\/blog\/2013\/03\/26\/refining-in-the-21st-century-part-1-contd\/","title":{"rendered":"Refining in the 21st Century Part 1 Cont’d"},"content":{"rendered":"

\u201cHe who can no longer pause to wonder and stand rapt in awe, is as good as dead; his eyes are closed.\u201d Albert Einstein<\/p>\n

I am sorry for those anxiously awaiting the continuation of Refining in the 21st<\/sup>\u00a0century.\u00a0\u00a0 I have been very busy for which I am very grateful for.\u00a0 I hope you have taken the time to reflect on what was discussed in the\u00a0previous blog<\/a>.\u00a0\u00a0 A pause goes a long way in allowing us to process.\u00a0\u00a0 Without further ado\u2026..Part 1 cont\u2019d.<\/p>\n

Now that the new paradigm has been set for oil, \u00a0there are many inter-relationship that have changed.\u00a0\u00a0 Of recent ,the EIA has shifted its reference fuel to Brent.\u00a0\u00a0 This is a very reasonable shift as the center of demand is no longer the US but the growing Asia region.\u00a0\u00a0 As an aside note, \u00a0all the years I was at Purvin & Gertz, we never really believed WTI represented an appropriate benchmark for USGC.\u00a0\u00a0 The better benchmark was LLS.\u00a0 However the financial market was too fixed to WTI to be able to change the benchmark.\u00a0\u00a0 Currently you can see the reason why WTI can fail as a USGC benchmark. With the spread to LLS blowing up as pressure from Canada and shale oil have practically filled the center of the US; and with limited access to the USGC from Cushing WTI, it has decoupled to say the least against LLS \u2013 see chart below.<\/p>\n

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In the long run, this is one of the less costly economic arbitrages to solve via pipelines.\u00a0\u00a0 In fact there is a pipeline reversal occurring this year along with an expansion.\u00a0\u00a0 However the future markets continue to show a large spread with 2014 spread still above $5\/bbl.\u00a0\u00a0\u00a0 A pipeline from Cushing to USGC should be able to produce reasonable economic return for $2\/bbl with the past demonstrating much less.<\/p>\n

Also many don\u2019t understand a very important policy choice, that \u00a0the Energy Policy and Conservation Act 1075 (P.L. 94-163, ECPA) which directs the President to restrict the export of crude oil.\u00a0\u00a0 The US is in a very unique position given the shale revolution not only\u00a0increased natural\u00a0gas production,\u00a0but also significant liquids production.\u00a0\u00a0 This policy decision should lead to some strong US refining outlooks.<\/p>\n

When we examine the refining world as I discussed previously, it is very highly dependent on the feedstock.\u00a0\u00a0 There is so much to cover in understanding refining economics that I will write this section requiring some basic understanding of refining.\u00a0\u00a0 Basics include crude oil quality and the difference between hydroskimming, cracker, and coker.\u00a0\u00a0 Also an understanding of why refiners chose various crudes.\u00a0\u00a0 I have spent days teaching the basics to clients who are brand new in the refining business.\u00a0 In fact one of my first international task was a course on refining to PDVSA.\u00a0\u00a0\u00a0 I have built some of the most sophisticated models for crude evaluations for both buying and selling.\u00a0\u00a0 I believe the Kuwait Petroleum Company still uses the model we worked up for them at Purvin & Gertz.\u00a0\u00a0 Nonetheless refining is not a simple discussion without some basic understanding.<\/p>\n

With the paradigm shift of higher prices allowed the spread of products to widen.\u00a0\u00a0 It is only natural to think margins should move as percentages instead of absolutes.\u00a0\u00a0 If your feedstock cost you $10 and your margin is $1 your return is 10%.\u00a0 If your feedstock is $20 and you still only obtained a dollar margin your return not drops down to 5%.\u00a0\u00a0 This is likely going to hamper your ability to get financing and potentially put you out of business as your weighted average capital cost is above that unless you are regulated entity.\u00a0 This should be no different in the refining industry.\u00a0\u00a0 The absolute value of the margin spread will be forever much larger than historical view until the feedstock falls back down.\u00a0 The proper view for refining margin is to view it as return on feedstock as seen below.<\/p>\n

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A return of 16-18% will likely suffice in the USGC to keep the industry going.\u00a0\u00a0\u00a0 WTI and LLS will converge to produce a return at that level.\u00a0 If we looked at it on an absolute basis – see below, it would suggest that refining margins will have much to fall in this $100\/bbl environment, which is not the case.<\/p>\n

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The second most significant change in refining was the underlying belief in the increasing lower API and higher sulfur crudes – figure below.\u00a0 This made the refining strategy focus on technology and those that can process the more complex crudes would win over the simple refiners.<\/p>\n

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This came at a cost in both technology and variable cost.\u00a0 However the shale revolution has changed that paradigm.\u00a0\u00a0 The\u00a0liquids being discovered within the shale did not increase in API and also has lower sulfur.\u00a0\u00a0 This caused those who embarked on the above strategy a mismatch.\u00a0\u00a0 The light\/heavy differential is not as wide enough for the increase cost these refiners now have compared to the simpler configurations.\u00a0 This will likely not alter the long-term requirement of the crack spread to produce 16-18% return on feedstock, but it will impact inter-refinery competition and the strategy used to manage a refinery.\u00a0\u00a0 Once again my services would include helping you review your refinery and from crude selection to refinery optimization.<\/p>\n

In Part 2 we will discuss where the markets will go from here.\u00a0 If you review what we have covered you will likely have a good idea already where the markets will go.\u00a0 Critical thinking is key in the forecasting business.\u00a0\u00a0 I have had good fortune in my career to build that skill set.\u00a0\u00a0 Please do consider All Energy Consulting for your energy consulting needs.<\/p>\n

Your Very Grateful Energy Consultant,<\/p>\n

David K. Bellman<\/a><\/p>\n

614-356-0484<\/p>\n","protected":false},"excerpt":{"rendered":"

\u201cHe who can no longer pause to wonder and stand rapt in awe, is as good as dead; his eyes are closed.\u201d Albert Einstein I am sorry for those anxiously awaiting the continuation of Refining in the 21st\u00a0century.\u00a0\u00a0 I have been very busy for which I am very grateful for.\u00a0 I hope you have taken […]<\/p>\n","protected":false},"author":1,"featured_media":14,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,3,26],"tags":[123,198,118,91,125],"class_list":["post-637","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-market-insights","category-natural-gas","category-oil-petroleum-products","tag-crude-oil","tag-lls","tag-refining-economics","tag-refining-margins","tag-wti"],"_links":{"self":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/637","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/comments?post=637"}],"version-history":[{"count":10,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/637\/revisions"}],"predecessor-version":[{"id":645,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/637\/revisions\/645"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/media\/14"}],"wp:attachment":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/media?parent=637"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/categories?post=637"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/tags?post=637"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}