China is where demand for shale oil meets US supply

China is where demand for shale oil meets US supply
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Despite increasing rivalry and trade frictions, the world’s two largest economies, China and the United States, are becoming increasingly interdependent when it comes to energy.

On the supply side, the U.S. shale revolution is reshaping global energy markets, while China is the epicenter of demand growth. Simply put, China is where demand meets U.S. supply.


S&P Global Platts Analytics forecasts that global liquids production needs to rise from just under 95 million barrels per day (b/d) in 2015 to over 105 million b/d by 2025 to meet rising world demand.


Much of this supply growth will be light crude, and in particular U.S. light crude, which will account for just over 40 percent of growth in global crude output over this period.

The increase will come almost entirely from the United States’ shale plays, using the innovative drilling and extraction techniques developed over the last two decades. The most prolific of these, the Permian Basin in West Texas, will account for most of the growth.

Meanwhile, on the demand side, despite its new focus on environmentally sustainable technologies, China last year still overtook the U.S. to become the world’s largest importer of crude with imports last year reaching 8.43 million b/d.

This trend is set to continue. Platts Analytics forecasts that Chinese oil demand will rise by more than 4.5 million b/d over 2015-2025, making the country the single biggest driver of global oil demand well into the next decade.

Sweet versus sour

There are good reasons why U.S. light crude in particular will flow to China.

U.S. refineries are designed to process a slate of crudes from light, sweet (low sulfur) grades to heavier, sourer (high sulfur) grades from the Middle East, Latin America and Canada.

U.S. refiners have been able to substitute a significant proportion of imported light crudes, like those from West Africa, with domestic shale oil, but they still need a significant proportion of imported medium-to-heavy sour crudes to run their refineries at maximum efficiency.

This requirement means the U.S. will continue to import heavy, sour crude even as its exports of light crude rise. S&P Global Platts Analytics forecast that by 2025 the U.S. will be exporting more than 4 million b/d of light sweet crude, of which over 2.5 million b/d will go to Asia.

Unlike other large Asian refiners, which are primarily dependent on medium-heavy sour grades from the Middle East, China also imports crude from a wide range of countries including Angola, Russia and Brazil. These crudes give China a slate that is both heavier and sweeter than other Asian refiners.

Aside from its vertically-integrated state-owned oil majors, China also has a sizable independent refining sector, which accounts for more than a quarter of total refining capacity.

Given the name “teapots” due to the perception that they were small-scale, with very simple refining units, many of the independents now have a more complex configuration than their name suggests. Many are capable of producing high-quality products and petrochemicals.

Access to lighter crudes has allowed them to run their refineries more efficiently and maximize their yield of lighter, more-valuable products. They have invested in additional processing units to produce the higher-quality products like gasoline blending feedstocks that China increasingly needs.

They have accounted for most of the growth in Chinese crude demand. In March 2018 independent refineries’ crude imports reached an all-time high of 2.34 million b/d.

However, as a whole, the independent refining sector is unable to process high-sulfur crudes, owing to a lack of desulfurization capacity. They therefore typically run on a sweeter slate than other Asian refiners.

Light end of the barrel

There are two other factors that make China the natural home for U.S. crude.

First, to cut pollution, the government has mandated the use of much cleaner fuels across the country. For many of China’s independent refiners, unable economically to remove the sulfur from the crudes they process, sourcing sweeter grades, like those from the U.S., is the solution.

Second, the pattern of Chinese demand is changing as the country shifts from an investment-led economy to one based more on consumption. This will require more light products like gasoline and petrochemicals than it will gas oil and heavy fuel oil.

Some of China’s new oil product demand will be met by new complex refineries, which will be able to process heavier, sour crudes. But they alone will not be able to meet all the demand for lighter products, forcing China’s existing refineries to look westward to source lighter crudes.

In short, the U.S. will optimize its refinery operations by exporting light sweet grades, while China’s refining sector will reach maximum efficiency by importing them.

Sebastian Lewis is S&P Global Platts' content director for China. He has over 10 years' experience analyzing commodity markets and capital-intensive industries across Asia and the Middle East.