EIA completes study on rising crude oil adjustment, with two upcoming changes to reduce it

Over the past few years, the difference between our estimates of supply and disposition has increased in our U.S. crude oil balances. We have studied the growing difference and identified ways in which we have been overstating disposition and understating supply. Importantly, we believe these issues are unrelated to our monthly inventory statistics that we survey directly, but rather reflect the balance of all sources of supply and disposition. As a result of that work, we are initiating changes in our calculations and surveys that we believe will improve the balances in the future.

In 2022, the adjustment to the monthly U.S. crude oil supply data published in our Petroleum Supply Monthly (PSM) averaged 786,000 barrels per day (b/d) (Figure 1). This average annual adjustment was the biggest in our data history dating back to 1973.

Based on our study of causes of the rising adjustment, we found two causes.

First, our estimates of crude oil disposition have been overstated because we have been counting light hydrocarbons and unfinished oils that are blended into crude oil in our proxy for domestic petroleum consumption, which we refer to as product supplied in the petroleum balance. There is no product supplied of crude oil because there is no direct end use of crude oil. We believe this approach has overstated crude oil disposition above actual disposition because these light hydrocarbons and unfinished oils are blended into crude oil as exports or input to refineries.

Second, we have been understating crude oil supply because of unreported field condensate blended into crude oil at natural gas plant processing facilities, producing region tank farms, or directly into pipelines that carry crude oil.

To better understand these causes, we need to examine how we build our crude oil balances.

What is the crude oil adjustment?

When we develop our crude oil balances, if materials are classified accurately and are well-reported, crude oil supply should equal disposition. See Figure 2 for how the equation works and how it relates to our surveys and reporting. In Figure 2, we describe supply in our crude oil balance on the left, and disposition on the right for the PSM, but the same method is used for our Weekly Petroleum Status Report (WPSR). The adjustment we publish is the difference between the two sides of the equation, namely, the difference between our estimates of U.S. crude oil supply and of disposition. In reality, the results will always include an adjustment as a result of several issues, including survey reporting errors, sampling error, inconsistent product classification, and modeled estimates for some data sources.

The way we perform the calculation, a positive adjustment indicates that crude oil supply is understated, disposition is overstated, or some combination of both.

Our findings

Our first finding relates to how some products should be counted in our balances as supply rather than as disposition. Both our crude oil adjustment and product supplied estimates for natural gasoline and unfinished oils have been increasing along with crude oil production from tight formations over the past 10–15 years, particularly after crude oil export restrictions were lifted at the end of 2015 (Figure 3). Natural gasoline and unfinished oils are generally sold as intermediate feedstocks for further refinery processing or blending and actually have minimal end-use demand compared with other petroleum products. They are generally blended and sold as part of the stream of crude oil. The noticeable increase in product supplied in these hydrocarbon streams along with no known end use mean that these products are better understood as transfers to crude oil supply.

Our current practice of counting natural gasoline as product supplied rather than a component blended into crude oil tends to overestimate disposition and underestimate supply, increasing the adjustment. Furthermore, this accounting issue is compounded when natural gasoline is exported but counted as crude oil, which further inflates the disposition estimates. Crude oil blended with other hydrocarbons can be labeled crude oil when exported, even if up to 49% of the material is natural gasoline or unfinished oils. As a result, recent growth in U.S. crude oil exports may have increased the adjustment when we counted these blended products (Figure 4).

Actions going forward

We are implementing survey and methodological changes to fix these potential causes. These changes will take time.

To address overstated crude oil disposition, we will introduce a new column into our supply and disposition tables labeled Transfers to Crude Oil Supply to offset the double-counted volumes of natural gasoline and unfinished oils. In tight oil formations throughout the United States, blending occurs as oil is moved to storage. Moving these barrels from Product Supplied to Transfers to Crude Oil Supply will reflect market participant behavior more accurately and reduce the crude oil adjustment. This accounting change will reflect our current practice of already accounting for volumes of natural gasoline and other natural gas plant liquids (NGPLs) blended into crude oil in Alaska where operators need to blend these hydrocarbons with crude oil before shipping oil on the Trans-Alaska Pipeline System (TAPS).

Compared with our preliminary 2022 data table, we would add about 400,000 b/d to Transfers to Crude Oil Supply and reduce total liquids product supplied by the same amount (new changes highlighted in Table 1). Because this shift does not require any changes to our existing surveys, we can implement this solution relatively quickly. Nonetheless, making this shift will require survey system programming changes and time for quality assurance. We aim to publish the new Transfers to Crude Oil Supply column by the August release of our 2022 Petroleum Supply Annual (PSA). Following this change to the PSA, we will also add WPSR data estimates to reflect Transfers to Crude Oil Supply.

To address understated crude oil supply because of field condensate blending into crude oil at natural gas plant processing facilities, producing region tank farms, or directly into pipelines that carry crude oil, we will need to make changes in our surveys. We currently do not receive reports of field condensate production, which precipitates in natural gas gathering lines, in either our upstream production or natural gas plant processing surveys. We are developing additional questions to add to our survey forms, which requires research on question design, Office of Management and Budget (OMB) clearance for the new questions, and a period of time to conduct quality assurance tests. We plan to publish to a new product code, Condensate and Scrubber Oil field production, on our Form EIA-816 natural gas plant processing survey early in 2024.

In assessing the potential impact of these changes, we estimate the crude oil adjustment in 2022 could have been about 500,000 b/d less than reported. In addition to these proposed solutions, we also aim to continuously improve the quality of our accounting of crude oil field production while simultaneously limiting survey respondent burden.

For questions about This Week in Petroleum, contact the Petroleum and Liquid Fuels Markets Team at 202-586-5840.

Tags: crude oil, oil/petroleum, petroleum product supplied