Rockies refiners benefit as oil storage soars, crude prices fall: Petrodollars

As in other parts of the US, falling crude oil prices are proving a boon to refiners. Janet McGurty looks at how prices are impacting refiners and oil producers in the Rockies region of the US in this week's Oilgram News column, Petrodollars.

As crude production and takeaway capacity slows in PADD IV, the Rockies region of the US, regional refiners are reaping the benefits of higher production and a slowdown in takeaway capacity, which is boosting crude going into storage, pressuring prices down.

While some of these refiners are owned by small, regional independents like Sinclair, major oil companies like ExxonMobil, Chevron, Phillips 66 and Tesoro also operate regional plants. There are 17 refineries located in Montana, Wyoming, Colorado and Utah with capacity to process up to 641,000 b/d of crude.

During the first half of 2015, crude supply in PADD IV averaged 1.18 million b/d, according to Bentek Energy, Platts’ analytic arm. This includes crude produced in regions like Colorado’s Niobrara and Wyoming’s Power River Basin. It also includes heavy sour grades, like Western Canada Select, coming down from Canada.

Bentek expects this supply to rise to 1.23 million b/d by the end of 2015 and reach 1.34 million b/d by 2020 as production from the Niobrara, the region’s largest play, is expected to reach 280,000 b/d in 2015, up 38,000 b/d from the year earlier.

Heavy crude from Canada feeds 89,300 b/d of coking capacity in refiners in Montana, Wyoming, and to a lesser extent Utah. Colorado’s 103,000 b/d of refining capacity distributed over two Suncor plants refine only light sweet crude. There are no refineries in Idaho, the fifth state in PADD IV.

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Phillips 66 has the region’s largest coker, at 21,700 b/d, at its 59,000 b/d Billings, Montana, refinery. But CHS is the largest importer of heavy sour crude from Canada. The refinery, owned by a farming cooperative, has a 15,000 b/d coker at its 59,600 b/d Laurel, Montana, plant. In 2014, the company imported over 17 million barrels of heavy crude. In 2008, CHS upgraded the coker to boost diesel production by 5,000 b/d.

The price of WCS ex-Hardisty sent was assessed at an average of $32.05/b so far in October, Platts price data shows, while railing barrels into Cushing will add $10.80/b to the cost to get the heavy crude closer to Gulf Coast refiners.

PADD IV refinery capacity is expected to rise by 68,000 b/d by 2020, according to a joint report from Turner, Mason & Company and SBC, Schlumberger’s business consultancy arm. Of that, capacity to run light sweet crude will expand by 49,000 b/d while heavy crude capacity will increase by 19,000 b/d.

What crude not used by local refiners has to find its way out: by pipeline, rail or vying for increasingly scarcer regional storage space.

PADD IV crude stocks rose to top of the 5-year average scale, up almost half a million barrels to the 22.1 million barrels for the week ended October 2, US Energy Information Administration data showed. In the EIA’s March 2015 Storage Capacity report, PADD IV had just over 18.2 million barrels of crude storage.

As crude stocks hit up against the storage ceiling limit, movements of crude out of PADD IV into other regions will have to continue, pitting barrels from PADD IV against the surplus of crude in other regions.

This has weighed on regional crude prices. The average premium for the price of Bakken ex-Guernsey, Wyoming, compared with the price at its pricing point ex-Clearbrook, Minnesota, narrowed to $1.83/b in September 2015. Last November, Bakken ex-Clearbrook traded at an average $4.18/b below Guernsey, Platts assessment data shows.

Pipeline capacity out of PADD IV to PADD II, home of the oil hub of Cushing, Oklahoma, is currently about 700,000 b/d. But flows are lagging capacity.

Another 700,000 b/d of takeaway pipeline capacity is expected to pull barrels out of the region by mid 2016, according to Bentek estimates.

More crude will be used in the region, as PADD IV refinery capacity is expected to rise by 68,000 b/d by 2020, according to a joint report from Turner, Mason & Company and SBC, Schlumberger’s business consultancy arm. Of that, capacity to run light, sweet crude will expand by 49,000 b/d while heavy crude capacity will increase by 19,000 b/d.

However, as drilling slows and production falls off, refiners could feel the downside to the lower oil price: poor economics sometimes stop or slow production of indigenous crudes.

For example, Tesoro upped its diet of local waxy Uinta crude at its 57,500 b/d Salt Lake City refinery to 26,000 b/d from 22,000 b/d. It also considered using it at its 120,000 b/d Anacortes, Washington, refinery to replace VGO as feed to the gasoline-making FCC unit.

But low prices cut back on production of the waxy crude, with total Utah crude production falling to 100,000 b/d in July from the 111,000 b/d produced in the January, leaving Tesoro and fellow Utah refiners Chevron, and HollyFrontier a smaller piece of a shrinking crude production. — Janet McGurty