How will Ecuador force majeure impact US West Coast Refineries?
Latin America has become an increasingly important source of medium and heavy crude oil to feed America’s west coast refineries. Ecuador’s location on the northwestern coast of South America has made it especially important for these facilities even if volumes emanating from the country have fluctuated significantly.
On one level, Ecuador’s comparatively small oil production of about 500,000 bpd meant that its recently announced withdrawal from OPEC was not seen as especially significant. However, the country’s proximity to the US West Coast made it a logical supplier of substitute crude oil to offset declining Alaskan production.
The major refining regions on the US West Coast are Los Angeles, San Francisco, and Puget Sound areas. Small clusters are also located in the San Joaquin Valley of California near Bakersfield, Honolulu, and a few specialty facilities in Alaska. The technical complexity of the refining industry on the West Coast is very high.
Before the shale oil revolution, most US refineries were configured to process heavier crude grades . At the same time, it is logistically impossible for shale supplies to reach the US West Coast refineries by pipelines. The latest declaration of ‘force majeure’ on the majority of Ecuador crude oil exports will have an impact on the US West
Coast refineries.
Domestic unrest in the country has suspended production at three fields amid protests against rising fuel prices has even forced the government to move from the capital, Quito, to the coastal city of Guayaquil.
It is hard to know how quickly the government can regain control of these major oil fields that were impacted and how swiftly oil output might resume.
US West Coast refining capacity is around 2.5 million bpd, and about 11 percent of their crude oil requirement comes from Ecuador. This could conceivably be replaced by barrels from the Arabian Gulf producers or even filled from the spot market.
However, this in turn could impact the margins of the US West Coast refiners who would need to factor in additional long-haul shipping costs for replacements barrels.
The US Energy Information Administration says that US refiners imported an average of about 175,800 bpd of Ecuadorian heavy sour crude oil in 2018.
Roughly 81 percent of that crude from Ecuador was sent to US West Coast refineries, with the rest going to the US Gulf Coast refineries.
While the ongoing supply disruption to Ecuadorian crude has limited global significance, it nonetheless represents a potential positive for demand for heavy sour crude grades from the Arabian Gulf — already in high demand since the US imposed sanctions on Venezuelan crude imports.