Podcast script:
Shale oil is another name for the more technical term: light tight oil (LTO). It is characterized by being sweet due to its low sulfur content of 0.2%, and light for being less viscous with average API gravity between 35o and 55o API. It exists in many geological formations around the world, but the vast reserves of LTO in the United States are located in the Permian, Eagle Ford, and Bakken basins. In these regions, LTO became more economically viable to produce during the last couple of decades, thanks to technological innovation, easy access to low-cost financing, high crude oil price environments, and efficient, repeatable upstream development workflows by small independent producers.
In addition to the aforementioned factors, the United States congress repealed a 40-year-old, self-imposed ban on oil exports back in 2015, which allowed the American oil producers to compete in the international markets. These conditions drove the production of LTO to its peak, which exceeded 8 million barrels per day in early 2020, thereby transforming the United States of America from a net importer to a net exporter of petroleum. The LTO crude production boom transformed the landscape of the whole U.S. oil and gas sector across the entire oil value chain, which posed several unique challenges, such as oil refineries reconfiguration and optimization, midstream bottlenecks and investments, and shifting trade flows.
As for the first challenge, the introduction of large quantities of LTO to the current installations of oil refineries faced some serious obstacles. There are several types of refineries; each is a uniquely designed processing plant that is tailored to accommodate a certain type of input crudes, and works to reform crude to produce different outputs of oil derivatives. The problem is that the U.S.’s LTO contains a high content of naphtha and very low heavy residue yields, which is very different from some of the imported light oils that the U.S. refineries are used to processing historically.
The U.S.’s oil industry has foreseen this issue since the early 2000s, and has gradually increased its processing capacity of LTO crudes. In July 2020, about 37% of the U.S. refineries’ diet consisted of LTO crude, while 23% of it was based on conventional oil, and the remaining 40% was imported heavy oil. Likewise, many U.S. refineries in the past two decades have intensified their investments in crude oil resilience projects to process broader slates of crude oil, such as the much cheaper heavy sour and Canadian heavy oil.
Additionally, the refineries’ processing capacity was optimized by blending the LTO with heavier crude oils, based on quality, yield, and cost differentials. Blending tight oils with heavy waxy crude makes sense, as the blend can result in a desirable processing profile for many refiners. However, this can also lead to compatibility issues if blending was not optimized. This lack of compatibility required large-scale reconfiguration and optimization initiatives of the existing oil refineries.
Hence, the American refineries were able to mitigate several processing challenges of the new LTO, such as equipment fouling, high system pressure issues, and underutilized units. This move significantly improved the profit margins due to the utilization of cheaper crude feedstock. However, although most of the refineries on the U.S. Gulf Coast were gradually increasing the LTO in their refineries’ crude diet, it was impossible for all refineries to keep pace due to several reasons, the most important of which is the second challenge: midstream bottlenecks.
One of the main constraints that prevent the full utilization of LTO is the lack of a pipeline system linking producing fields and refineries. To make up for the shortage, railways and trucks are currently used to transport oil, which in turn affects the price and the demand for it. Similarly, future projects that integrate the U.S. refining and petrochemical complexes can overcome the downstream challenges of LTO, by using compatible processing unit designs such as metallurgy and capacity. It will also contribute to increased efficiency, decreased cost, increased stream integration, processing synergies, and operational flexibility.
New initiatives, such as crude-to-chemicals facilities, could provide greater yields from final products by using optimized conversion processes. In a matter of few years, the U.S. may have the highest petrochemical industry growth globally, mainly due to the rise in its production of tight oil and shale gas.
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