A new era for US Gulf Coast oil refining dynamics has dawned

After years of stockpiles and capacity constraints, a sea change in US crude flows began last week when the Seaway Pipeline expanded to 400,000 b/d. The pipeline marks the first capacity to link the oil hub of Cushing, Oklahoma, and the Texas Gulf Coast.

This is expected to usher in a new period of crude enlightenment, a “renaissance” as some are calling it, albeit more pragmatic than artistic. (That is, unless one considers the hum of a drilling rig to be a beautiful ballad, pipeline blueprints an architectural achievement or the energy analyst a great philosopher.)

Nearly a year ago, as a markets reporter trying to make sense of my new beat covering US Gulf Coast crude oil, my editors and managers used words like “unprecedented” and “shifting” to describe the exciting times to come in the US crude industry.

“You will learn to love it,” one of my colleagues said.

There are new developments that will change everything, industry folks said.

They were right.

In the next three months, awaited pipeline capacity will flow to the Gulf Coast region, relieving long-constrained crude production.

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One million b/d of pipeline capacity, most of it new, will connect Eagle Ford shippers with the Gulf Coast refining region. This is far more than what is currently being produced from the South Texas shale. But, in 2013, production levels are expected to rise beyond the Bakken Shale’s in North Dakota to 1.18 million b/d.

In addition, Midstream Partner’s Longhorn reversal project, that will run from Crane to Houston, Texas, will soon bring as much as 225,000 b/d of capacity online from the Permian Basin.

Upon flooding the Gulf Coast market with cheap, light sweet crude, the new pipeline capacity will cause pricing spreads to shrink — with Louisiana Light Sweet (LLS) narrowing to West Texas Intermediate (WTI), and WTI eventually gaining to Brent.

The LLS-WTI spread is expected to narrow to just $5/b, the cost of the tariff rate, in the second half of the year. That compares with Platts assessment Monday of LLS at WTI plus $16.50/b, down already from last year when it reached above the plus $20/b-mark.

While the WTI-LLS spread narrows, LLS is also expected to trade well below Brent, as the Gulf Coast light sweet benchmark comes more into parity with WTI.

The WTI-Brent spread, which to date has been the typical indicator of Gulf Coast spot prices, narrowed sharply last week. On January 11, the day of the Seaway expansion’s completion, the ICE February Brent contract traded at a premium of $16.88/b over the NYMEX February light sweet crude contract, its lowest level since September 20, 2012.

Adding more new supply to the Gulf Coast crude pool, Heavy Canadian crude such as Western Canada Select will also soon flow south on Seaway, sources have said.

As refiners gain access for cost-advantaged crudes, current record-breaking Gulf Coast refinery operating rates are expected to reach higher.

Tuner Mason analyst John Auers expects an increase of well over 1 million b/d of domestic light crude runs along the Gulf Coast, mostly displacing imported lights and mediums.

“The early stages of the US crude supply renaissance benefited a minority of US refining capacity in the middle portion of the US,” Tudor Pickering analysts wrote in a note released Monday. “However, midstream bottleneck alleviation is quickly bringing this crude to the coasts, particularly the Gulf Coast, where 9 million b/d of capacity awaits.”


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Comments

  1. Vin Diesel at January 18, 2013 3:46 pm

    Thanks John. That is very good news. The displacement of imports by N. American sources will only improve our net surplus in refined petroleum products and create pain for OPEC countries.

    The Saudis have invested a huge amount in the Motiva refinery JV so that will keep them busy anyway (and it’s basically a payoff to the US for our security umbrella in the Middle East.

    Who needs to go to war with Iran with these kinds of figures?! (Iran’s production is down 40% anyway and they are having trouble finding buyers for the remaining sour/heavy blends)

     
  2. John Kingston at January 18, 2013 3:32 pm

    The data is showing that it’s other countries that are taking the bulk of the hit. Mexico and Venezuelan imports are down, but in the case of both countries, so is their production. But Nigeria’s exports to the US are down by more than half from their peak, and the Saudis are down by anywhere from 400,000 to 500,000 b/d. The EIA import figures for individual countries is available at http://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbblpd_m.htm

     
  3. Vin Diesel at January 18, 2013 3:02 pm

    Since this domestic crude will replace imports, does it spell doom for Mexican and Venezuelan imports or will they find far off refinin markets (albeit at a discount)?

     
  4. Jim King at January 17, 2013 1:26 pm

    What is not said in the article is that access to Gulf Coast refineries for stranded oil also means access to global markets and global prices. This means US oil prices are likely to increase with corresponding increases in fuel prices. Also not said is that there is no guarantee that this oil (or products refined from it) will be sold to the US market. The US can be outbid on the global market.

    I expect continued tough economic conditions ahead in the US due to a lack of cheap oil to fuel economic growth. A new era indeed, but the consequences will be painful for many in the US.

     
  5. Pawel at January 17, 2013 8:40 am

    It is not going to happen as the long North Route to Asia is locked for over 6 months a year.

     
  6. John Kingston at January 16, 2013 5:48 pm

    Terry, you wouldn’t reverse the Alaska Pipeline to do that. There actually was a proposal by somebody–can’t remember who–to ship Canadian crude by rail to the Valdez export terminal and ship it to Asia from there. We haven’t heard anything about that proposal for awhile. Reversing the Alaska pipeline puts oil into the Beaufort Sea with all its winter shipping restrictions and environmental considerations; there’s no point in that.

    But ultimately, what probably is going to happen is that the TransCanada natural gas pipeline that goes to Ontario and eastern Canada will be turned into a crude line, providing another exit to market for the growing Canadian supplies.

     
  7. Terry Marti at January 16, 2013 11:50 am

    OK, So why not reverse the Alaskan pipeline to move Canadian crude to Alaskan ports to ship to Asia etc. ?????

     

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