USAC refiners could replace Russian crude with Bakken to loosen tight supply

US Atlantic Coast refiners could boost volumes of Bakken crude into their plants to replace Russian barrels, helping to increase crude supply and lower the price of gasoline and diesel in the region, according to speakers at a press conference the American Fuel & Petrochemical Manufacturers held April 4.

The trade group held the conference to address the impact of high oil prices and refined product price volatility stemming from the loss of Russian crude, feedstock, and refined products on US refiners.

Rising crude prices following the loss of Russian crude oil are showing up as record-high prices for gasoline and diesel in the US, with the oil industry—and refiners in particular—absorbing ire from some consumers and industries as to why costs were rising.

"Refiners do not root for high crude prices," said Susan Grissom, AFPM's chief industry analyst. "Refiners are really kind of in the middle," she added, noting "supply-chain challenges" are playing a major role in the current high prices.

S&P Global Commodity Insights assumes that total Russian oil exports, including crude oil, products, and feedstocks, will fall by roughly 2.8 million-3 million b/d from late April through December.

The lure of higher-margin Russian crudes

The USAC has been affected by the loss of Russian crude more than other regions, as over the past few years many plants shifted their slates toward more Russian crude to get higher margins.

According to Energy Information Administration data, USAC refiner imports of crude from Russia and Kazakhstan reached nearly 25 million barrels in 2021, about 68,000 b/d, or about 12%, of crude imports into the region on better refining margins.

First-quarter 2022 USAC margins for Urals and CPC Blend for USAC refiners averaged $25.25/b and $20.97/b, respectively, which outstripped margins for Nigerian Bonny Light and US Bakken at $17.05/b and $15.67/b, respectively.

Delta Air Lines' Monroe Energy, which operates a 190,000 b/d refinery in Trainer, Pennsylvania, had signed supply contracts for Russian crude in October and November 2021, "prior to the current crisis," but a company statement made clear "Monroe does not plan to enter into additional agreements for Russian-supplied crude oil for the foreseeable future," a company spokesman said.

Bakken the likely beneficiary

Some USAC refiners do receive waterborne US Gulf Coast crude but the higher transport cost of American-flagged Jones Act vessels has limited demand and sent refiners relying on waterborne crude imports or domestic crude by rail.

While Bakken flows have dropped over the past few years, Monroe has been steady in its intake of North Dakota Bakken crude, according to a source familiar with refinery operations.

"Bakken has been steady at 50,000 b/d every few days for a couple of years now," the source said.

During its 2015 heyday, USAC refiners imported more than 370,000 b/d of Bakken crude, building out and bulking up rail infrastructure to meet the demand for crude by rail. In 2021, that fell to just over 37,000 b/d as low tanker rates made waterborne vessels more attractive.

However, with the loss of Russian crude and higher refined product prices bolstering stronger margins, Bakken volumes have a good chance of increasing.

"I expect to see some increase" in Bakken into the USAC," said John Auers, senior vice president of Turner Mason during the press conference.

Auers noted that the buildout of rail capacity carrying the North Dakotan crude into the USAC refineries, which was built up in 2014 with the rise of Bakken crude production, gives them "optionality" to increase volumes.

Auers also noted that part of the USAC gasoline and diesel tightness is the lack of refining capacity, in part from regional refinery shutdowns, including the refinery at St. Croix in the US Virgin Islands. Once the largest refinery in the Western Hemisphere, owned jointly by Amerada Hess and Venezuela's PDVSA, it was shut down in 2012 because of poor economics.

Recently the plant restarted at a lower capacity under a new owner but was shut down in response to Environmental Protection Agency issues. However, another new owner—West Indies Petroleum—has indicated it wants to restart the plant, which has the advantage that it does not need to use more-expensive Jones Act tankers.

"There's a potential refinery restart taking place in St. Croix Virgin Islands, which you know if that's successful that could provide more product to the East Coast market," said Auers, adding the EPA should work to evaluate what it would take to restart the plant.