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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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The One Thing That Could Derail The U.S. Oil Boom

Two South Korean refiners have canceled the delivery of U.S crude oil cargoes that were due to arrive in January and February this year, Bloomberg reported earlier this week. It cited unnamed sources from the industry as saying the refiners had been concerned about the quality of the crude. Quality could at some point become a bigger problem for U.S. producers.

It’s all because of the pipelines, Bloomberg’s Serene Cheong, Sharon Cho, and Alfred Cang write in an analysis of the issue. There is a massive pipeline network carrying crude oil from the U.S. shale patch to the Gulf Coast ports where it is loaded on tankers and sent to Asia, with South Korea emerging as the biggest buyer of U.S. crude so far this year.

Yet with so many pipelines—trunks and branches—the oil gets contaminated with various undesirable things, from oil residue to heavy metals, pipe cleaning agents, and a group of compounds called oxygenates. These last ones are particularly worrying for refiners, it seems.

Oxygenates, including ethanol, are added to gasoline during the production process in order to reduce carbon emissions and soot. However, they have no place with the crude oil yet to begin being processed at a refinery as they can have a negative effect on the quality of the fuel eventually. What’s more, some other contaminants can affect the refining equipment as well.

All this justifies the cancelation of the cargoes by SK Innovation and Hyundai Oilbank and highlights a potential problem whose solution is, to date, non-existent. The way to solve this problem would be to have a separate pipeline infrastructure for every type of oil produced in the shale patch but this is impossible at the moment. This is how oil is transferred to the field to the export terminal in the Middle East, and this makes its quality more stable, one analyst told Bloomberg’s reporters. Related: China’s Mad Scramble To Boost Domestic Oil Production

In the case of the canceled cargoes—both sold by BP—the oil came from one shale play, the Eagle Ford. The Eagle Ford is a lot closer to the Gulf Coast than North Dakota, home of the Bakken shale, and yet it got contaminated during its journey to the tanker. While absent in the Gulf of Mexico, where the pipeline infrastructure is more consistent than the network onshore, the problem could become serious and potentially undermine the competitiveness of U.S. oil in a small and unfought for victory for Middle Eastern producers vying for a bigger market share in Asia.

Yet one of these cargoes did get sold, to a Chinese independent refiner, Bloomberg’s sources said. Teapot refiners have different refinery configurations and their quality requirements are, apparently, not as strict, so even contaminated oil can find a home. Yet this would not solve the problem.

“Since the surge in U.S. tight oil formation crude output, there have been persistent quality issues, particularly on consistency,” John Driscoll, chief strategist at JTD Energy Services told Bloomberg. “What does it mean for U.S. exporters? They need to tighten up the specs or face pressure from buyers for further discounts.”

By Irina Slav for Oilprice.com

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  • Anonymous Anon on March 28 2019 said:
    1. There is not "one thing" that can derail production. Production waxes or wanes because of multiple factors.

    2. This is not the first time a cargo has been rejected nor will it be the last. This oil will just get sold with a small discount to a different customer. (Article even notes this.)

    3. This is not the first time metals concerns have come up with respect to US condensates. The issue is mostly not from the oil itself but from processing through various channels (which are not dedicated to ultraclean condensate). I remember seeing stories on this ~ a year ago also.

    4. This happens with other suppliers as well (e.g. Iran). It is one reason why producers of pure condensate as the main stream can generally get a premium (e.g. Tapas oil) especially in Asia where the material is used for petrochemicals, not mixing into regular refining slates to make transport fuels.

    5. There is some work going on to try to get dedicated pipes (or at least better batch control) as well as more dedicated tanks to minimize junking up the pure condensate. This will take time and frankly is dependent on how important the problem is commercially (needs to be enough of a premium to justify the investment). While sources of condensate are increasing, there are issues especially from the Permian in transport (don't expect sudden improvement in quality control until we have excess pipeline capacity).
  • John H on March 29 2019 said:
    BS. Warren Buffet is pissed because he can't rail all the oil to terminal and is creating a "crisis" to get his foot back in the door.
  • Carl Eby on March 30 2019 said:
    One might think that the pipeline operator is also acting as a shipper, buying discounted sour crude, mixing it with high quality WTI and presto magic, you sell sour crude as sweet and the refiner takes the hit to profitability. This practiced started , when the MERC started in early 80's and they only had a Sulphur test to determine what the definition of sweet oil was. Remember, each tank has mixers as required equipment.

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