BIKE: Crude oil refining capacity at limit

[Roger Baker]

The international price of oil is soaring, but that number hides the 
underlying fact that there is no longer the capacity to refine the kind 
of oil that is now being produced and offered to the world market.  
That adds one more bottleneck, and is one more rerason that the price 
of refined products like gasoline will keep rising from now on.

Which is one more reason why the 30+ year maturity toll road bonds 
promoted by the real estate and road construction lobbies will fail, 
sucking up the capital that we needed to provide transportation 
alternatives like bike and transit and ped facilities. -- Roger




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here's an article which I think is very important:
http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=5800501

It tells us clearly that currently there is no spare capacity for sweet 
/
light grades of crudes. The only surplus is in the heavy / sour grades.

For any company / country  / region that extracts oil, when they have a
choice, they will always attempt to get out of the ground the stuff that
commands a premium, light/sweet FIRST.

Light sweet crudes are the best for gasoline and distillates, for
heavy/sour grades more work has to be done at the refinery. This also
requires significant investment if the refinery is currently geared to
distill light sweet crudes.

The article points out the current high differentials between light and
heavy crudes and says that some customers are refusing offers of more 
heavy
Saudi oil. To me this is a very bright red flashing light that the only
spare capacity is in the heavy stuff, and represents a big moment as 
far as
the oil peak goes. In years to come the mix of light / heavy and sweet /
sour will trend towards the grades that are harder to refine, this will
have some impact in the Energy Returned on Energy Invested. So ignoring 
how
difficult crude will be to get out of the ground, more energy will be
consumed to convert it into products which is demanded.

ilan
Melbourne, Australia.

- - - - - - Article text in full: - - - - - -
   By Jonathan Leff

LONDON (Reuters) - Saudi Arabia's oil pumping spree is finally bringing
down prices on international crude markets -- but only for the dense,
low-quality grades that have little impact on benchmark futures prices 
in
London and New York.

A surge in Saudi production since June has pushed prices for its Arab 
Heavy
crude and other similar grades to deep discounts against the 
higher-quality
light crudes that are at historic highs on U.S. and European markets.

"We are moving toward an oversupply of crude, but it's an oversupply of
heavy crude," said one senior oil trader at a major company. "The only
thing a seller can do now is discount them more and more."

Oil markets are more split than ever between prized light crudes rich in
gasoline and distillates, and bottom-of-the-barrel heavy grades, which 
are
more complex to refine and produce lots of low-value fuel oil.

Heavy supplies have swollen as top world oil exporter Saudi Arabia 
raises
production toward 9.5 million barrels per day -- cutting its spare 
capacity
cushion to just one million bpd -- in a bid to cool world prices.

The kingdom has promised to supply customers with all the crude they 
want.
The trouble is that Saudi Arabia is already pumping as much as it can of
the light, gasoline-rich crude that refiners crave.

Some major Saudi customers have taken the extraordinary step of turning
down additional supplies of its heavy crude, the only kind it has to 
spare.

"If there's no more cracking capacity, it doesn't matter how cheap it 
is,
no one will buy it," the trader added.

GLOBAL HEAVIES

The heavy glut has deepened as other Gulf OPEC producers joined Saudi
Arabia in raising output. OPEC is now pumping 30 million bpd, the 
highest
rate in 25 years and up by more than two million bpd since May.

The situation has been compounded by increased heavy crude supplies from
outside the cartel as the international oil business experiences a major
shift toward denser crude.
Many of the major oil developments over the past few years have been for
heavy supplies -- from Norway's Grane field to Angola's Girassol and new
Hungo blend to Canada's oil sands and Venezuela's syncrude developments.

What's more, light, sweet production in the North Sea and the United 
States
is declining.

Just as important is a global glut of heavy fuel oil, the loss-making
by-product of refining used primarily in shipping and some power plants.

While gasoline and heating oil prices have soared to multi-year highs 
this
summer, fuel oil has barely budged.

The crude divide is most noticeable in West Africa, where Nigeria's
light-sweet Bonny Light and Angola's heavy-sweet Cabinda have drifted 
apart
by more than $3 a barrel in the last few weeks, far wider than ever 
before,
traders say.

Other heavy grades are suffering the same fate -- Syria was forced to 
cut
the price on its Souedie grade to a record low $12 below North Sea
light-sweet benchmark BFO, down $5 from July.

By comparison, North Sea sweet crudes are now trading $2 over the
benchmark, their steepest differentials in 14 years.

SOUR TOO

The same trend is happening in the sulfur content of crude, with sour 
-- or
high-sulfur -- supplies rising and the gap between Russian Urals and 
North
Sea sweet ballooning to $5.

A wide sweet/sour spread will typically be worked out relatively 
quickly by
the market as refiners shift their slates to accommodate cheaper oil.

The heavy-light anomaly may be trickier.

"The way out is for refiners to put in enough upgrading units to process
more heavy crudes," said an oil trader. "I would only expect to see that
happening in the next one to one-and-a-half years."

U.S. refiners have been actively adjusting to the more sour slate, 
boosting
hydrotreating capacity by 36 percent in 2000-2003, but their coking
capacity to deal with heavy grades has climbed only 12 percent, 
according
to a PFC Energy report.