Not all Oil is created equal. A look at Extreme Oil.

The cover article of the April 2012 edition of Time Magazine highlighted a trend in the oil exploration industry where major oil companies are drilling oil in nonconventional locations around the world. The article termed these oil sources ‘extreme oil’, due to the intensive exploration process required to access and recover the oil. These oil companies are developing oil wells in the Artic, off of the coast of Brazil, and in the oil sands region of Canada.  The oil from these regions is more viscous and contains different chemical make-up from traditional sources. Three of the major sources of Extreme Oil include:

ARTIC OFFSHORE

·         Background: As the climate changes, a substantial amount of ice is melting in the Artic Sea. As a result, more land area is becoming exposed and creating more opportunity for offshore drilling and oil shipping.

·         Production Cost: +$100/barrel

·         Reserve Estimates: 90B barrels

BRAZIL OFFSHORE – (Deep-water Salt)

·         Background: Reserves are below thick layers of salt beneath the ocean floor. Companies have to drill down 9000ft to the ocean floor and then an additional 5,000ft through salt. These are some of the deepest wells in the world.

·         Production Cost: $55 per barrel

·         Reserves Estimate: 50-100B barrels

CANADIAN OIL SANDS

·         Background: Sandstone is saturated with dense petroleum called bitumen. Gasoline results in 10% more greenhouse gas because of the extensive refining process.

·         Production Cost: $50-75 per barrel

·         Reserves: 170B barrels

With the rise of more expensive and dense oil sources, many traditional refineries are not properly equipped to refine the ‘extreme oil’. As a result, refining companies are experiencing and increase in operating costs and in some case have to close sites. Many recent refinery closings have occurred in the Northeast US. Recently, Philadelphia based Sunoco cited losing a $1M per day and closed its Philadelphia-area Marcus Hook refinery. Sunoco is also seeking a buyer for the Northeast’s largest refinery, in Philadelphia, due to poor operating margins. If the company is unable to sale the refinery, they will close the Philadelphia site. Also, Houston based ConocoPhillips recently closed its Trainer, PA refinery citing high operations cost. These refineries coming off line is creating a substantial shortage of refined oil in the Northeast.

As of 2011, there were 141 operating US refineries, most are located in the Gulf and western US. Many energy experts are concerned of the loss in refining capacity because the gasonline would have to be shipped from the refineries in the Gulf or Western US. Ultimately, the increase in logistics cost will add to the price consumers pay at the pump, creating a spike in northeast gas prices.

Below are the major Northeast refineries, their national rank, and their refining capacity

·         #9 Sunoco – Philadelphia  335,000 barrels per day – FOR SALE Potential Closure

·         #24ConocoPhillips -  Linden, NJ 238,000 barrels per day

·         #36 ConocoPhillips - Trainer, PA 185,000 barrels per day - CLOSED

·         #39 Sunoco - Marcus Hook, PA 178,000 barrels per day - CLOSED

-Bernard
April 11, 2012