Limited refining capacity is crimping the surge in shale oil production. Learn how “teapots” and “toppers” are making savvy investors rich during the shale boom…
If there were an Achilles’ heel for America’s exploding oil sector, refiners would have to be it.
Even with the copious amounts of oil we’re able to extract from the ground, it’s all for naught if we’re unable to deliver them to market.
Our increasingly inefficient network of refineries are managing for now, but the situation is likely to get worse.
You see, due to EPA regulations, there have been no new refineries with capacity larger than 50,000 bpd built since the mid-seventies.
In the meantime, energy demand is soaring and there is a bottleneck in the making.
British energy consultant Douglas-Westwood estimates that the world’s energy needs will grow by 17% come 2020. To meet that demand, 670,000 wells will need to be drilled in that time span.
In the US, Douglas-Westwood predicts the number of onshore oil well completions will spike 36% through 2020.
To be able to handle that amount of gushing oil, US refiners are hoping to add 500,000 to 850,000 bpd of capacity by the end of the decade.
At the top-end of output, it would be the equivalent of constructing 2 shiny new large-scale refineries.
The problem is that it takes upwards of 5 (or more) years to move one refinery project from approval through to completion.
So rather than starting from scratch, big players such as Valero Energy Corp (NYSE:VLO) and Marathon Petroleum Corp (NYSE:MPC) have decided to expand their existing refineries, which is generally cheaper to do since they can leverage existing infrastructure and experienced staff — all within oil-friendly jurisdictions.
More importantly, they don’t have to deal with the long and arduous task of obtaining new environmental permits.
Valero is looking spend $800 million to add an additional 185,000 bpd capacity to its Texas plants, while Marathon is building out a further 50,000 bpd at its plants in Illinois and Kentucky to handle crude from the Bakken, Utica, and Eagle Ford.
Another solution being implemented is the restarting of smaller, mothballed refineries.
Known as “teapots”, these tiny plants typically employ a few dozen people and have capacities ranging from 5,000 to 40,000 bpd.
During boom times, teapots were the norm, comprising the majority of the 301 refineries that existed in 1982, according to the EIA.
Fast forward to 2013, and the total number of refineries operating in the US has been slashed by more than half to 143.
Funny enough, capacity remains the same, which means that existing plants are being stretched to the limit.
Being firmly in the midst of another energy resurgence, old teapots are now reopening, with small caps like Blue Dolphin Energy (OTCMKTS:BDCO) moving into little towns like Nixon, TX to take advantage of the new market opportunities.
Another trend on the rise in Texas is the building of smaller, specialized plants known as “toppers”.
Toppers differ from conventional refineries in that they are only designed to process ultra-light oil such as the kind extracted out of the Eagle Ford shale.
Even then, the oil is only partially processed, but is sufficient enough to be shipped to foreign markets where the real refiners complete the job.
Kinder Morgan Energy Partners (NYSE:KMP) is building a 100,000 bpd topper in Houston, TX, and Magellan Midstream Partners (NYSE:MMP) is planning a similar sized facility in Corpus Christi, TX.
All told, US refinery investments over the next few years are going to add up to around $5 billion.
Leading up to this point, refinery stocks were one of the best performing segments in the energy markets — and they did little else other than to offer their services as needed by the fuel producers.
Now that a major capacity upgrade is underway, their red-hot run is likely to continue awhile longer.