We have survived the bruising primaries with some close races, surprising results in a few cases, and yes, runoffs. After the runoffs, it is time to move on, politically reunite our oil and gas community, and focus on the November elections, which are critical to our industry. I hope our supportive incumbents and Republican candidates aren’t too beaten up from the primaries to face the opponents in November. There is much at stake, and I hope we all have some firepower left to urge our candidates on to election in November.
Light Sweet Crude Refining Capacity
In my January article, I wrote of concern over inadequate capacity for light, sweet crude oil refining relative to growing supplies of light sweet crude and condensate from unconventional plays. I’d like to think the refiners read our bullish press on the unconventional boom going on in the Permian Basin and Eagle Ford. Whatever the cause, the Wall Street Journal (WSJ) and IHS report that Valero, Marathon Petroleum, Kinder Morgan Energy Partners LP, and Magellan Midstream Partners all plan light, sweet crude projects generically referred to as “splitters” or “toppers.” The notion behind these non-technical terms is very little treatment (no cat crackers, for example, which are used to heat and “crack” or partition heavy crude into a range of products including diesel, jet fuel, heating oil, and lubes). The WSJ cites specific plans for 400,000 barrels per day (bpd) of light, sweet refinery expansion projects in the U.S. by 2018. I would not be surprised if it is over 1 million bpd of additional capacity by 2018. Recall that Valero is the largest independent refiner in the country, with a couple of refineries in the Houston area, one in Beeville, the closest refinery to the Eagle Ford, and one in the Texas Panhandle. Marathon Petroleum, recently spun out from its E&P brother Marathon Oil Corporation, is expanding refineries in Illinois and Kentucky, with access to Bakken crude and Marcellus/Utica condensate and NGLs. Noticeably absent from the list are Exxon Mobil and Motiva (Shell/Saudi Aramco JV), who operate the two largest refineries in the United States, located in Baytown and Port Arthur, respectively. Both XTO, as subsidiary of Exxon Mobil, and Shell are active in the unconventional resource plays and should keep their refining sisters aware of what is coming down the pipe, and it isn’t heavy sour crude.
What’s surprising are new players on the refining scene, the public Master Limited Partnerships (MLPs), namely Kinder Morgan and Magellan. Kinder Morgan is the Exxon Mobil of the MLPs, with nearly $100 billion of enterprise value in its three public entities. Kinder Morgan recently acquired El Paso Corporation, one of the largest interstate gas transmission companies in the United States. Kinder Morgan is the largest transporter of refined oil products in the country. Rich Kinder can do about anything he sets his mind to, and his 100,000 bpd splitter project would produce gasoline and diesel fuel for export. Magellan is the operator of the Longhorn Pipeline from West Texas to the Houston refining complex, with 225,000 bpd of capacity. It was this pipeline reversal project completed in 2013 that first relieved the bottleneck of crude oil in the Permian Basin. Magellan’s splitter project would be located in Corpus Christi, close to the Eagle Ford. It would also be in the range of 100,000 bpd of capacity.
While this is very encouraging news, it is offset by the news that Pemex is now exporting light, sweet crude to Europe. My theory in the January PBOG article that Pemex might need some light crude may be flawed; however, the light crude and condensate exports are sourced from coastal fields out of Pemex’s Villahermosa Region, not the inland refineries closer to Texas. There are no new developments on the crude export front, but the light, sweet oil refinery expansion projects offer a ray of hope that our light crude and condensate from the Permian’s unconventional plays won’t get bottled up in the Permian and suffer severe discounts. The timing of growth of light crude on the market versus light, sweet refining capacity is still of concern, but the “splitter” projects are cheaper and quicker to construct and put into service than the heavy, sour crude refining projects were in the 1990s.
Oil and Natural Gas Exports
On the export front, the WSJ reports that Republican congressmen and energy state Democrats, including Senator Mary Landrieu of Louisiana, are pressing the White House for gas exports to the Ukraine, whose sovereignty is being threatened by Russia. About 70 percent of the Ukraine’s natural gas supplies come from Russia, and half of the gas flowing to the European Union flows through the Ukraine. Russia supplies 30 percent of the European Union’s gas, so you can see the strategic importance of the Ukraine for both Russia (exports) and Europe (imports). Recall that natural gas exports from Russia to the Ukraine and Europe were halted in 2006 and 2009 due to financial disputes between Russia and Kiev, the capital of the Ukraine. Europe had to pay high prices for LNG from all parts of the world, including Trinidad and West Africa.
Certain members of the U.S. Congress, including Speaker Boehner, would like President Obama to use our plentiful energy resources as a diplomatic tool. At present, laws require the recipient of our exported gas to be our free trade partner or in our “national interest,” which is subjective. The Energy Department has approved six such natural gas export requests to non-trade partners and 20 applications are pending. Gas consumers such as Dow Chemical, big beneficiaries of cheap natural gas and NGLs, which are feedstocks for its petrochemical products, oppose gas exports. Dow and its competitors are leaning on Congress to limit LNG and NGL exports. It makes for strange alliances between petrochemical companies and environmental activists who oppose the development and use of fossil fuels.
Just when you think the world is settling down with the primaries behind us, we are reminded how complex and intertwined the global energy market is and how global politics affect both the price and flow of energy. Energy is the building block of any economy and is a primary driver of mankind’s quality of life, including warm homes and schools in the winter, cool homes and offices in the summer, cars to drive to work and to play, and planes to take us places or fly fresh food to us each week. Never lose sight that what we do (developing, producing, and transporting oil and gas) matters to billions of people across the globe, not just 317.6 million Americans. It affects the balance of power across the globe and the preservation of our freedom and potentially the freedom of those abroad.