It was almost like a bidding war at the Platts North American Crude Marketing conference in Houston on its first day today, with bullish projections flying around the room on the ultimate impact the shale revolution would have on US and North American liquids production.
Citibank’s Ed Morse said his team expected growth of more than 2 million b/d over the next three years, but also said a growth rate of 3 million b/d wouldn’t surprise him. Russell “Rusty” Braziel, president of RBN Energy but citing the estimate of his former employer, Bentek Energy (a unit of Platts), said much the same thing. Cory Garcia, an analyst at Raymond James Equity Research, said his firm is targeting a growth rate of 4 million b/d.
Whatever. The biggest point of discussion is how this flood is going to get to market, and if it doesn’t, what sort of dislocations will it produce after already generating inter-market spreads never envisioned just a few years ago.
Morse, whose firm predicted a steep widening in the Brent-WTI spread a few months ago, sees a long road ahead before any sort of “equilibrium” is reached in the Brent-WTI spread. He envisioned “blowouts” to come: a further blowout between WTI and LLS, a blowout before the Seaway Pipeline is reversed later this year to begin taking crude away from Cushing and down into the Gulf of Mexico, and in 2013, which he said “will be the year that will be the most stressful on Canadian and Midcontinent crudes.”
“There will be no equilibrium” anytime soon, Morse said, because the total system that crude must travel through is the “ultimate bottleneck.”
Dr. Craig Pirrong, a professor at the University of Houston who has built a career on the study of energy markets, tried to put a value on fixing that bottleneck. He did so by taking the two largest announced projects to take crude away from the Cushing bottleneck: the Seaway reversal, and the Cushing Marketlink project, better known as that part of the delayed Keystone XL pipeline project that would run from Cushing to the Houston area. He then looked at the differences in the Brent/WTI spread down the forward curve, which is about $16 now but is closer to $4 in late 2015.
Putting those two together, Pirrong estimated that the value of the new capacity to be added is about $10 million per day, a number that can’t help but attract more investment. Tacking on another 150,000-250,000 b/d of capacity would bring the per diem value of the total new capacity closer to $1 million, a figure Pirrong viewed as more reasonable. As he noted, “Infrastructure does catch up when the value is there, which it is, and it is quite strong.”
Pirrong also took a dig at the Brent benchmark, always in competition with WTI to be the market’s top dog. It’s a battle that Brent has been winning for the last few years, with WTI’s value sinking along with rising US Midcontinent and Canadian crude production. But Brent has problems with falling production, and as Pirrong said, “North American infrastructure is a lot easier to expand than North Sea output.”
So when you’ve got this much crude, and not a whole lot of places to put it or easy way to move it around, plus you have a room full of conference speakers and attendees to talk about it, you get some pretty good speculation. For example:
–Crude exports popped up as a possibility. Morse said he believes a reading of US export regulations would allow Canadian crude to move through the US and be exported directly out of a US port without violating any laws. (Of course, that scenario is exactly what critics of Keystone XL say would happen, and just being a highway is not enough of a reason to approve the project). Braziel said export of condensate with a gravity in excess of 50 API is not covered by export regulations, and some of the liquids coming out of the Eagle Ford would meet that specification. So exports of that liquid could be undertaken without legal concerns.
–Two speakers on a panel about rail transportation–Dennis Smith, a vice president at railroad BNSF, and Briand Freed, vice president of business development of Bakken producer Rangeland Energy–both said they estimate about 23%-25% of Bakken crude is being transported to market by rail. Tank cars are spoken for; ordering a new one would entail a one-year wait.
–Freed showed a map showing the price of moving crude from the Bakken to various markets on “manifest” trains, those that are not solely carrying crude, which are known as unit trains. Pipeline transit to Cushing is $4/b, vs. $9.85 on a train; Patoka is $4.33 vs. $9.74. To the Northeast US, it’s $12.58/b; there’s no corresponding pipeline number, since it’s impossible to get Bakken crude to the northeast via pipeline.
–Talking about the opportunity that the growing surge of US crude production has placed in the railroads’ lap, Smith said BNSF’s motto has become, “We’re thankful for every tankful.”
–Although many airlines have gotten burned by hedging their fuel exposure on WTI–watching it fall relative to the global price of jet fuel–that doesn’t mean Jon Ruggles thinks it’s never a good idea to be in it. Ruggles, vice president-fuel at Delta Airlines. said if a situation arises where the price of WTI is $70, and that’s $30 less than Brent, “that’s a fantastic hedging opportunity for me.” But most of the airline’s exposure was rolled into Brent last year, he said.