A fresh look at U.S. crude oil industry infrastructure is required as crude oil production is expected to exceed 11 million barrels per day by 2023, analysts said.
The U.S. is poised to leap frog over Russia to become the top crude oil producer, but with new output predominantly light sweet and ultra-light crudes, domestic demand for the supply will be limited without large-scale capital investments.
The U.S. domestic market can only absorb about a quarter of the additional 4 MMbbl/d of U.S. crude expected to enter the market in 2023, Ed Rawle, chief economist at Wood Mackenzie said. "Most U.S. refineries are configured to process medium and heavy crudes. In 2016, just 32% of the crude processed by U.S. refineries were light crudes," he said in a March 5 report.
The U.S. will need to expand export opportunities to absorb the excess production and will likely need to discount prices to remain competitive. In the near term, the U.S. will focus on transports to Europe, where transport costs are lower compared to other markets including Asia. This will require the U.S. to discount the price of U.S. crude grades to fight African crudes for European market share, according to the report.
Once European demand is sated, the marginal barrel will then shift to Asian markets in 2022, where higher transport costs will require even further discounts to capture market share, Rawle said.
John Coleman, Wood Mackenzie's senior analyst North American crude oil markets said, "Not all U.S. light crudes are created equal." Differences in quality suggest a strong appetite for Permian crude in Europe and Asia.
About half of the U.S. onshore production, or 5 MMbbl/d by 2023, will come from the Permian basin where the quality of the crude oil produced could fetch a premium of about 50 cents per barrel over Cushing blend and crude produced in the Eagle Ford.
Demand for Permian crude requires more takeaway pipes. New takeaway capacity headed toward Corpus Christi and potential for a massive port infrastructure enhancements is positioning Corpus Christi to reach 2 MMbbl/d of exports by 2023.
Producers, midstream operators and investors able to capitalize on this transformation will be able to thrive in the new global environment, Coleman said.
The International Energy Agency concurs that additional investment in infrastructure is needed to meet global oil demand growth over the next five years.
In its "Oil 2018: Analysis and Forecasts to 2023" released March 5, the IEA said it expects production growth from the U.S., Brazil, Canada and Norway could meet demand through 2020, with the U.S. providing 80% of that additional supply. However, massive growth in North American oil supply from 2018 to 2023 will increase the need for new infrastructure to be built.
"If sufficient capacity is not built, the increase in production we foresee could be at risk, with serious implications for global markets. The anticipated supply boom has already triggered a flurry of investment in new pipelines in West Texas, the U.S. Midwest and West Canada. Potential export bottlenecks exist, however, because of the rapid pace of the supply increase and the long distances involved," the IEA report noted.
The U.S. has seen a substantial rise in crude exports, but increased shipments could be hampered by limited capacity in the Gulf Coast. To alleviate existing limitations, investment in new pipeline capacity and terminals is underway. The IEA expects export capacity will reach 2.5 MMbbl/d by the end of 2018, 4.7 MMbbl/d in 2020 and 4.9 MMbbl/d in 2023.
West Texas is expected to see the majority of pipeline growth through 2020 with 2.8 MMbbl/d of capacity announced, equivalent to more than half of all investments.
"At the end of 2017, [light tight oil, or] LTO output and pipeline capacity were finely balanced with just 160 [kbbl/d] of line space available. This small cushion will come under pressure in 2018 as LTO output rises. The key question for West Texas crude producers over the next year is likely to be whether or not TexStar Midstream Logistics LP's 550 [kbbl/d] EPIC pipeline will be up and running in 2019 as originally planned. A pipeline shortage could reduce the price of WTI Midland relative to Cushing – the prime US crude pricing hub – and Houston, on the Gulf Coast," the IEA report said.