If you’ve ever stared at your local coffee house menu board, completely baffled by the names and choices, then learning about the variety of crude oils extracted from the ground might be an equally mind-boggling experience… only without the caffeine kick afterward.
But understanding how crude oils differ from one another and what kind of refining process is required for each can shed light onto one of the critical issues the oil and gas industry faces today. And that is: Do US refiners have the capacity to take advantage of abundant shale production?
The short answer is: They’re working on it…
How Do You Take Your Crude? Light & Sweet or Heavy & Sour?
Refineries take a nearly useless hazardous material – crude oil, the unprocessed stuff that comes out of the ground – and turn it into valuable refined products like gasoline, diesel and jet fuel, petrochemicals, and other materials, including the Styrofoam cup your java comes in.
The old Beverly Hillbillies TV show may have fixed in most minds the image of a dark, thick, bubblin’ crude. But the fact is that crude oils vary in color, from clear to tar-black; in viscosity (most easily defined as the thickness of a liquid) from watery to almost solid; and in quality. Quality is determined by the components that make up the crude, which include sulfur, heavy metals, waxes, water, and mercury.
In addition to those characteristics, crude oil is classified by a system that could make even a Starbuck’s barista’s head spin.
First, each crude has a name. You’ve probably heard of Brent and West Texas Intermediate, if not Bonny, Maga, or Oriente. Crudes are also grouped by grade or type – sweet, sour, light, medium, heavy – depending upon their sulfur content (that’s the sweet versus sour part; sweet is low in sulfur, sour is higher) and API gravity, which is the American Petroleum Institute standard for how heavy or light a petroleum liquid is compared to water. If the API gravity is greater than 10, the petroleum liquid is lighter and floats on water. If it’s less than 10, it’s heavier and sinks. Most values fall between 10 and 70 API gravity degrees.
Light, sweet crudes have a higher proportion of the light molecules used to make premium fuels like gasoline, naphtha, and – to some extent – diesel. Heavy crudes have a higher proportion of molecules that can only be used to make diesel fuel or residual fuels oils that are sold at a discount to ships or power producers. Heavy crudes are also more difficult to refine, requiring intensive processing using catalytic cracking and coking units.
Ready for your soy, half-caff, no whip, caramel macchiato yet?
Doing the Refinery Three-Step
As you can see from the illustration below, different types of crude oil yield a different mix of products. The economic viability of a refinery depends on the crude it can obtain and process (called crude slates), the complexity of the refining equipment (refinery configuration), and the type and quality of products produced (product slate) to meet market demand.
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So, how does a refinery turn a barrel of crude into the useful products we rely on? It generally takes three basic steps.
1. Separation through distillation. Modern distillation involves pumping oil through pipes in hot furnaces and separating light hydrocarbon molecules from heavy ones. Products or “fractions” from the top, middle, and bottom of the distillation column travel through pipes to different plants for further refining.
Simple refineries that separate different molecules by distillation have always prized light crudes because it takes less work and time to refine them into higher value products like gasoline. That explains why light crudes traditionally were sold at a premium.
2. Conversion through “cracking ” or “coking.” Heavy crude oils are cheaper for the refiner to buy, but they require more processing to yield lower-value products. Modern complex refineries, however, can convert and upgrade the heavy residuals left over from distillation into lighter and more valuable molecules by processes called cracking and coking. The end results are premium products such as gasoline, naphtha, jet fuel, and road diesel.
3. Treatment. This is the final step, where natural impurities like sulfur and nitrogen are removed. Because its structure is consistent with the light, sweet profile that is easiest to distill and process, abundant shale has become the darling of US refiners.
All This Shale and Nowhere to Go
Thanks to the rapidly growing supply of shale oil, especially from the Bakken, Eagle Ford, and Permian basins, US crude oil production has reversed a long-term decline that started in 1970. In its January 8, 2014, weekly petroleum report, the Energy Information Administration (EIA) estimated that US crude oil production averaged 7.5 million barrels per day in 2013, the highest annual average rate of production since 1989.
The only problem? Many of the country’s major refineries aren’t configured to process sweet, light oils – like shale – that constitute the majority of the sharp production hike. Most of the light, sweet crude infrastructure is moving crude into the US Gulf Coast, where refineries had invested in complex configurations that allowed them to use cheaper feedstock (read: heavy, sour crude imported from Canada, Venezuela, and Saudi Arabia) in order to produce the large quantities of gasoline Americans demanded.
This means that, today, companies in North Dakota and Texas that are producing lighter, sweeter types of crude oil can’t find enough refiners to process it. Although refineries on the East Coast are better equipped than Gulf Coast facilities to process shale oil, transporting the oil presents another roadblock. There simply aren’t enough pipelines, and the Jones Act – which was established in 1920 to protect sailors – pumps up the cost of shipping by water.
One measure of the power of rising domestic shale production is the steep decline in US imports of light, sweet crude, mostly from Nigeria. As recently as 2010, American refineries that use light, sweet crude as feedstock depended upon that west African nation for about one million barrels per day. By the third quarter of 2013, however, refineries had replaced about 90% of Nigerian imports with domestic shale.
Recent announcements by US refineries underpin the massive switch to domestic crude. In 2012, Valero Energy’s Gulf Coast and Memphis, Tennessee, plants replaced all foreign light oil imports from Brazil, Nigeria, and North Africa with domestic crude from Eagle Ford, Bakken, and Louisiana fields. Phillips 66 has also met its sweet demand along the Gulf Coast with Eagle Ford and Bakken crude, boosting domestic crude production from 112,000 barrels per day in 2012 to more than 200,000 barrels per day last year. And in January 2013, Marathon Petroleum announced it would displace foreign crude oil imports at its Gulf Coast refineries with domestic sweets.
But even if refineries stop importing light sweet all together, this fact remains: There’s still not enough capacity to process all the shale that’s being produced. In other words, where will the new barrels of shale crude go?
Refinery reconfiguration is an option. But it’s an expensive choice, and probably a frustrating one for refiners who already devoted large capital expenditures to increasing capacity for imported heavy sour crude. However, given the qualities of shale, the motivation to process it is enormous. Marathon Petroleum and BASF Total are among the refineries announcing plans in 2013 to upgrade facilities to process more shale oil. The Sunoco refinery in southwest Philadelphia, which was scheduled to shut down in August 2012, was instead upgraded and has reopened with capabilities to refine Bakken shale.
Other refiners are maximizing output by blending the light, sweet crude from US shale fields with heavier imported crudes. But blending crudes can create equipment-damaging incompatibilities unless facilities are retooled or new equipment is brought on line.
That’s because shale oil, while low-cost and high-yield, isn’t a perfect feedstock.
The quality is highly variable, not only differing from one basin to the next but even within individual basins. Shale oils can be high in solids, including high-melting point waxes, that can accumulate and cause equipment blockages. Other issues that can affect shale processing include the presence of hydrogen sulfide (which produces that “rotten egg” smell) and the potential for corrosive salt build-up. Some industry experts even say that the Bakken and Eagle Ford plays are too light: while they yield liquid petroleum gas (LPG), gasoline, and diesel, they don’t have enough “gas oil” and residue to keep the gasoline-making heart of refineries running properly.
Still, shale provides diversity to the refining slate and is a welcome alternative to more expensive imported crude oils. Like a coffee cup filled to the brim, the US refining industry is making the right moves now to keep the shale oil supply from becoming too much of a good thing.
