Below are highlights of the testimony given by Jamie Webster, Senior Energy Director, IHS Inc., before the US Senate Foreign Relations Subcommittee on Multilateral International Development, Multilateral Institutions and International Economic, Energy and Environmental Policy.
“The catalyst for the oil price decline that started last summer was the partial (and temporary) return of Libyan production. But it was the underlying growth in US oil production from 5.6 million bpd in 2011 to the current 9.5 million bpd that sustained this price drop. OPEC’s decision last November 27 to not cut production in the face of growing volumes, not just from US shale oil, but also the Gulf of Mexico as well as Canada further hastened the price decline. It seems unlikely that OPEC will reverse itself in its upcoming Ministerial meeting on June 5. OPECs decision, reaffirmed on June 5, appears to have marked the beginnings of a serious shift in how supply and demand is balanced in the global market, potentially allowing the oil market to be a market based system rather than relying on a balancer as has often been the case in the past. The balancer as defined here is that group, regulatory body or other organisation that is willing and able to quickly reduce or increase oil supply in an attempt to keep the market balanced.
“The boom in US production has the potential to upend the need for a formal market balancer, leading to lower oil prices for consumers, while increasing energy security for not just the US but the world. This is possible not only because of the large production volumes that US producers have brought to the market, but because of the character of those flows. Conventional production projects can take years to finance, plan and bring to the market. US shale producers can do it in 4 months. Globally, conventional production has a decline rate of 5 – 6%, meaning a project will be producing much less each year. US shale production has an initial decline rate of about 50%. These two factors allow the US shale system to react quickly to market signals to bring more oil onto the market, and a lack of investment when prices turn downward can quickly reduce supply. This shift from OPEC to the market driven forces of shale oil is far from certain and far from complete and it could be reversed.”
One of the key policy changes needed to help support this shift is the liberalisation of US oil exports. Energy flows into and out of the US have already provided partial benefits to the region and the world.”
“The US has a liberal trade policy for natural gas, coal, refined products and processed condensate. It also allows oil exports to other countries in certain, very specific cases. Allowing US producers to seek out international markets for their product will allow them to receive global prices, keep the laboratory of US shale technology and production fully open for business, while supporting job growth across many industries and in places far from the oilfields. It will also help to lower the price of Brent, the benchmark price for global oil, much as the increase in production already has. Lowering the Brent price is the access point to lower US gasoline prices because US gasoline prices are linked to the Brent world price, not the domestic WTI price.
“Moreover, maintaining the ban increasingly undercuts US credibility in its three decades endeavour to persuade other nations to permit free flows of energy trade and not constrain trade in strategic commodities with political restrictions and resource nationalism. The US, for instance, has launched numerous complaints under the WTO against China exactly because of these kinds of restrictions on natural resources that China imposes.”
Unleashing the supply chain
“The IHS report ‘Unleashing the Supply Chain’, documents the benefits across the economy from 2015 – 2030:
- US$86 billion in additional GDP.
- About 400 000 new jobs annually.
- 25$ higher pay for workers in the energy industry supply chain, an additional US$158 per household.
- US$1.3 trillion in federal, state and municipal revenue from corporate and personal taxes.
The benefits accrue across most of the US, not just oil producing states. States like Illinois, Washington State, Massachusetts, and Michigan, with little or no oil production, also benefit substantially in terms of economic activity and jobs, owing to the interconnected nature of US supply chains.”
“Continuation of this ban hurts American consumers, causes an unnecessary drag on American productivity, and does not let the US exploit fully the national security benefits from our energy resurgence. The reasons are intertwined with the nature of the American refinery system and the price discounts that American producers must take in order to sell their products competitively to refineries, particularly along the Gulf Coast, which holds over half of the nation’s total refining capacity. Over US$85 billion has been spent in the past quarter century to reconfigure these refineries to process heavy oil imported from countries like Venezuela, Mexico and Canada. The US contains the largest refining capacity of any country in the world, with 140 operating refineries with a combined crude oil distillation capacity of about 18 million bpd. The US refining system is characterised not only by the number and size of refineries but also by a high number of world class, high complexity, full conversion refineries with a substantial degree of petrochemical and specialty products integration.
“In this complex refining system, if the crude quality varies enough, the refineries cannot run optimally within their designed operating parameters. In the Gulf region, most refineries are configured to process heavy crude oil. When using light tight oil, Gulf refineries operate inefficiently.
“Unfinished products are the result of this crude mismatch, which have a lower value because they require further processing to be upgraded into gasoline, jet and diesel fuels. In some cases the crude quality mismatch is large enough that a refinery will have to reduce the crude oil throughput to process additional volumes of light tight oil. As a result, there are limits to how much of the new, domestically produced light tight oil the refining system can efficiently and effectively process. To fully use light tight oil, many Gulf Coast refiners often require a price discount.”
“This brings me to Mexico. That country is eager to extend its imports of US natural gas to include oil. For now, Mexican oil production is in decline and gaining access to US light tight oil will help boost those refineries supply options, particularly as they are now best suited to use American light tight oil instead of its own heavier Maya oil. Mexico could enter into a swap arrangement, exporting its own oil in exchange for American light tight oil. However, the constraints of the crude export policy as well as the commercial requirements to put in this specific swap are causing difficulties in effecting a trade that would benefit both countries. Liberalising US oil exports would allow a more simple transaction, while retaining all the benefits.”
Edited from testimony by Claira Lloyd
Read the article online at: https://www.hydrocarbonengineering.com/refining/29062015/us-crude-testimony-ihs/