U.S. Markets closed

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

Irina Slav

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

More Top Reads From Oilprice.com: