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Tight oil boom gives edge to US petchems and refining

20 January 2014 Dewey Johnson

Horizontal drilling and hydraulic fracturing have ushered in an energy revolution in North America enabling producers to access so-called tight oil-light crude held in low-permeability underground rock formations. But the story of how this relatively newfound, highly cost-competitive energy source is transforming the US refining and petrochemicals industries is just beginning to be told. The revolution's impact on production and global pricing mechanisms has significant implications for capital investment in the downstream refining and petrochemicals sectors that will reshape the industry for years to come.

In just a few years, the surge in US oil and gas production has transformed the region's supply-and-demand balances and lowered feedstock prices to the point where the American refining industry is now a strong global competitor and a net refined-products exporter. As a consequence, the US Gulf Coast (USGC) refining industry is rapidly adapting to accommodate the rush of light sweet crude oil from all over America while shifting away from the medium-heavy sour crude that just a few years ago was anticipated to be the most common grade of petroleum on the market.

One consequence for the USGC refining and petrochemicals industry is that the supply of domestic light sweet crude is replacing imports as domestic output reaches a production plateau. What's more, the increase in US and Canadian heavy sour crude production will keep prices discounted relative to offshore heavy sour imports.

The size, complexity, and flexibility of the USGC refinery system's assets will enable Gulf Coast refineries to process a wide range of crude grades into diesel, gasoline, and petrochemical feedstocks. Aided by low-cost crude oil, cheap natural gas, and the industry's own high conversion capacity, US refineries are now the most cost-competitive players in the Atlantic Basin. The challenge ahead for US refiners is to determine the right level and timing of capital investment required to balance the increase in crude supply against declining US gasoline demand, which has fallen as automotive fleets have grown more efficient and domestic diesel demand has increased more slowly than forecast.

The impact of the new energy developments on petrochemical supply chains for products such as propylene benzene and paraxylene is as complex as the chains themselves. To remain competitive, the US petrochemicals industry will require a thorough understanding of the long-term ramifications of unconventional oil and gas developments on refining and petrochemical feedstocks, making this new report required reading for industry stakeholders.

Dewey Johnson, Senior Director of research, IHS Chemical.

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