The Industry That’s Refining Shale Profits

In the past three years, U.S. oil production has surged thanks to shale formations such as North Dakota’s Bakken and Texas’ Eagle Ford.

For refineries with access to these formations, this is very good news. As production has swelled, so have exports, which are now up 60% since 2010. And profits are following suit.

Amazingly, the surge has occurred in spite of the fact that no refinery with a capacity greater than 50,000 barrels per day (bpd) has been built since 1976 (thanks to environmental regulations).

However, production is quickly reaching a ceiling. If more refining capacity were available, the sky would be the limit for industry profits – and companies are taking note.

Refining Capacity Additions

In total, there are 18 projects nationwide aimed at quickly boosting capacity and output.

Over the next five years, refineries want to add anywhere from 500,000 to 850,000 bpd of refining capacity in the United States. This is the biggest gain in light oil refining capacity in literally decades. (For reference, a large-scale refinery has a capacity of about 400,000 bpd.)

But environmental regulations make it tough to quickly add capacity. So how are the refineries going to tackle this problem?

For starters, large players like Valero Energy (VLO), Marathon Oil Corporation (MRO) and Tesoro (TSO) are using engineering methods to expand their existing refineries, which is more cost-effective than building brand-new facilities. Valero is aiming to add 185,000 bpd to its refineries in oil-rich Texas, while Marathon will add 50,000 bpd to its facilities in Illinois and Kentucky.

The Rise of the Teapot Refineries

Yet in spite of the moves by larger players, the real change in the industry is a revival of very small refineries (called teapots) and the construction of new plants called “toppers” or “splitters.” These plants produce lower emissions, making it easier for them to gain environmental approval.

Additionally, these miniature facilities are capable of processing very light crude one step before it’s exported overseas to be further refined into gasoline or diesel. Here’s a look at a few of these smaller players:

Jeff LunnenComment