U.S. complex refineries could get squeezed: Barclays
A mismatch between oil supply and refinery demand on the U.S. Gulf Coast could “pose some problems for profitability” at the mega-plants designed to process heavier slates of crude, new research by Barclays Capital says.
Gulf Coast refiners that have spent big on coking additions – necessary to process heavy, sour grades of crude like Canada’s oil sands – may now be tripped up by soaring U.S. light oil production. The investments were made when marginal barrels were getting heavier and Canadian bitumen exports were on the rise. But tight oil and pipeline constraints (see Keystone XL) have changed the equation, Barclays says.
“The combination of the incremental crude barrel getting lighter and the marginal refinery preferring heavier slates is likely to create a significant compression in light-heavy differentials over the coming years, in our view, rendering a lot of the large capital investments undertaken by refineries to upgrade rather futile,” Barclays says.
Midwest refiners, by contrast, will continue to see the fat margins enjoyed through much of 2011, the London-based bank said in a global energy outlook released March 1. The same factors that now threaten to pinch Gulf Coast plants saw gross refining margins in the Midwest average US$22.25 per barrel through 2011. They hit US$18.90 on the Gulf Coast and US$4.83 in the U.S. Northeast, according to Barclays.
Even with TransCanada Corp. hiving off the southern leg of its Keystone XL expansion, the sudden ascent of shale oil will challenge complex refiners’ profits, according to Barclays. “… [W]ith a compression in light-heavy spreads, the profitability of these refineries may be put into question in the coming years.”
Closer to home, the trend adds context to a decision made last month by the Alberta government to walk away from a proposed $6.6-billion upgrader backed by Teedrum Inc. and several aboriginal groups. As Alberta Oil columnist and IHS CERA director Jackie Forrest has noted, why shovel money at another “merchant” upgrader when the market for synthetic barrels is in retreat?