Given the volume of Canadian oil-sands and North American shale-oil supply slated to come online over the next decade, imports of sweet crude greater than 30° API will be displaced in the U.S. Gulf Coast (USGC) refining market. We could see the U.S. exporting crude by 2015.

In 2010, refiners in the USGC area (PADD 3) processed approximately 7.4 million barrels a day. Combining that with the Midcontinent (PADD 2) and Rocky Mountain area (PADD 4), U.S. refiners processed 11.3 million barrels a day. Of that total, sweet crude imports accounted for 1.8 million a day, and light sweet imports (>35° API) were around 989,000 barrels a day. Sweet crude imports, excluding Canadian sweet crude, totaled 1.5 million a day.

While U.S. conventional light sweet crude supply in PADDs 2, 3 and 4 accounted for 2 million barrels a day in 2010, shale oil added 311,000 barrels a day. But, refiners in these regions processed a total of 4.9 million barrels a day of sweet crude, requiring most of this to come from imported sources.

However, this balance is quickly changing. Production from the Bakken, Eagle Ford, Permian and Niobara plays continues to increase, along with synthetic crude oil output from Alberta. Hart Energy projects shale-oil supply will reach 1.6 million barrels per day by 2015 and 1.8 million by 2020. At the same time, an additional 165,000 barrels a day…and 354,000 barrels of sweet crude will be imported from Canada.

Our analysis suggests that USGC refiners will be able to handle incremental shale oil and Canadian sweet supply by backing out imported sweet crude. Initially, light sweet imports will be displaced, followed by medium, and later, heavy sweet volumes.

The chart shows the balance for sweet crude in PADDs 2, 3 and 4 through 2020, with the cumulative sweet crude total held at the 2010 levels, and the sweet crude imports reduced to reflect the expected increase in shale-oil supply.

The increase in shale oil can be balanced through 2013 by backing out light sweet crude imports with API greater than 35°. The additional volume between 2014 and 2018 can be accommodated by backing out some of the imported sweet crude with API between 30°-34.9°.

U.S. crude exports?

The chart’s black line assumes light crude demand remains at the 2010 level. The red line reflects refinery rationalization of 270,000 barrels a day of sweet crude capacity between 2013 and 2015, and another 150,000 a day between 2018 and 2020 (reflecting declining U.S. oil demand). In the rationalization case, all the light and medium crude will be backed out by 2015 to accommodate rising shale-oil production. By 2018, all sweet crude will be displaced.

With no rationalization of sweet-crude refining, the market gets close to being balanced around 2017-18, and we could see the market change to an export balance. In the rationalization case, the balance could move to exports sooner, by 2015. Hart Energy expects some rationalization, but sweet crude’s portion of rationalization may be lower.

A shift towards exports would weaken light crude prices and narrow the light-heavy differential. A reduced light crude oil price should reflect one to two times the cost of transport to the closest alternate market. Although relevant, it will not be as high as West Texas Intermediate’s discount in 2011, when Midcontinent crude could not go anywhere except for additional, inefficient Mid-continent processing or very expensive transport to the Gulf Coast.

As a result, refinery margins for light crudes will remain low until 2015, but then strengthen as demand picks up and the crude balance changes direction. WTI’s discount will disappear by 2013, as sufficient crude oil pipelines and rail infrastructure will be available by year-end 2012, helping equalize supplies, quality and price.

Terry Higgins, who leads Hart Energy’s downstream consulting group, co-authored this article. Hart Energy Research will release its study, “Unconventional Oils And Their Impact On Infrastructure And Refining In North America,” in first-quarter 2012. See hartenergy.com/research , or contact Conrad Barnes at cbarnes@hartenergy.com .