Shale Oil Boom Boosting US Refiners
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The shale oil and gas boom in the United States continues to reshape a wide variety of American industries. For some industries, it's a blessing (petrochemicals) while for other industries (such as coal), it's a curse.
Another sector being affected greatly by the shale boom is the US oil refining industry. The good news here is that the effect looks to be a positive one. Many US refineries, particularly on the East Coast, were on the precipice of being relegated to the dustbin of history. But now shale oil from places like Texas and North Dakota may change their outlook and save them from oblivion. North Dakota has now overtaken Alaska to become the United States' second-biggest producer of oil, trailing only Texas, with an output of about 575,500 barrels of oil per day.
This boom in oil production has led to wide discrepancy between the prices of domestically produced oil and imported crude oils, giving a lifeline to refiners who could not survive paying for expensive ($100+ a barrel) oil, especially in the light of flat US gasoline demand. In fact, according to data from Reuters, the discrepancy is about $35 a barrel between Brent crude oil and that from North Dakota.
But with so much cheap shale oil coming from the Bakken in North Dakota, the amount of oil produced has exceeded the capacity of the pipelines carrying oil to east coast refineries and elsewhere. So refining companies have turned to other solutions.
Some firms have begun to place large purchase orders for rail cars in order to ship the oil from North Dakota to their refineries. The recent spinoff from Conoco, Phillips 66 (NYSE: PSX), has ordered 2,000 rail cars (at a cost of $200 million) in order to carry up to 120,000 barrels of oil per day to refineries on both coasts. And Phillips 66 is far from alone in shipping Midwest oil to its refineries on either coast.
Another refiner, Tesoro (NYSE: TSO), initiated a $60 million rail shipping project last year capable of moving 30,000 barrels of oil a day from the Bakken to its west coast refineries. And beginning late last year, Sunoco (NYSE: SUN) has been railing about 20,000 barrels of oil per day to Albany, New York, and then barged down to Philadelphia where it has a refinery. Of course, this is a drop in a bucket when one considers that Sunoco imported about 343,000 barrels of international oil a day for its Philadelphia refinery. But it is the beginning of a major trend.
Let's remember too that rail cars are not the only possible solution to refiners' problem of getting access to cheap shale crude. Canadian pipeline company Enbridge (NYSE: ENB) is in talks with Valero Energy (NYSE: VLO) to reverse the flow of a 240,000 barrels of oil (from the Canadian oil sands) per day pipeline to bring the oil to Portland, Maine. From there, the oil would be loaded onto tankers for shipment down the East Coast.
The bottom line here is that oil output from US shale oil plays will increase significantly by 2016. The only problem is how to get that cheap, abundant crude to the refiners who so desperately need it to stay in business. After all, crude is 85 percent of the cost of gasoline.
As can be seen here, the refining companies are working on creative ways to get their hands on that crude. This should give hope to the companies and their shareholders.
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