At the Wellhead: Rail to the rescue for the US East Coast refining industry

The US East Coast refining industry has taken it on the chin for several years, buying crude at Brent-related prices while their Midcontinent rivals have enjoyed the depressed values of WTI. But the nation’s railroads are changing that, and 2013 is expected to be the year where the results of a turnaround can be seen. Bridget Hunsucker reports on the shift in this week’s Oilgram News column, At the Wellhead.

————————————————–

Downtrodden US East Coast refiners will thrive this year as refining margins begin to rally thanks to increased rail shipments of cheap light sweet crude from the Bakken Shale in North Dakota.

The influx could soon result in a “major shift” of East Coast refinery margins up the curve of US refiner profitability, Baker O’ Brien analyst Charles Kemp said, adding that regional utilization rates should also improve.

East Coast refiners will soon supply more regional refined product demand, backing out waterborne gasoline and diesel imports, analysts said.

Kemp compared the refined product margins of domestic refiners during a presentation this week at the American Fuel & Petrochemical Manufacturers annual meeting in San Antonio, Texas. Kemp’s margin curve, which ranked results from the third quarter of 2012, showed Midwest and Rocky Mountain refiners on top. These regions have direct access to cost advantaged crudes like Bakken.

North Dakota Bakken production hit a new record of near 770,000 b/d in December 2012, and Bakken production is up 40% since January 2012. More than 60% of the Bakken production is moved by rail.

Blog entry continues below…


Request a free trial of: Oilgram News Oilgram News
Oilgram News Oilgram News brings fast-breaking global petroleum and gas news to your desktop every day. Our extensive global network of correspondents report on supply and demand trends, corporate news, government actions, exploration, technology, and much more.
Request a trial to Oilgram News

Near the bottom of the margin curve are East Coast refineries.

East Coast refiners traditionally process light sweet crude from Atlantic Basin producers. Prices for light sweet imports are linked to the price of the relatively expensive North Sea benchmark Brent crude. East Coast refiners became less competitive in the US market as the price of inland domestic crudes, like Bakken, became cheaper relative to the price of Brent.

East Coast refiners, which, once seemed to have no alternative but to close down, now seek rail access to low-cost inland domestic supplies, Kemp said.

Some East Coast refineries were brought down by poor margins. Sunoco shut a 175,000 b/d refinery in Marcus Hook, Pennsylvania in December 2011, about two years after it shut its 145,000 b/d Eagle Point New Jersey plant. Hess earlier this month closed its 70,000 b/d refinery in Port Reading, New Jersey.

“The refineries that are shut down are shut for good, but the ones that are open will stay open…the East Coast refining market is a survivor,” Turner, Mason and Company analyst John Auers said. Over the next several years, 800,000 b/d of rail unloading capacity is planned to be operational along the East Coast. That amount is equivalent to 11 unit trains per day or a 36 to 40-inch pipeline running to Philadelphia from North Dakota.

————————————————–

By the end of this year, Bakken rail deliveries to the region should be between 150,000 to 200,000 b/d. The East Coast can absorb about 800,000 b/d of Bakken crude, Auers said.

“We expect East Coast margins to improve, but we expect other US refiners are also going to be trying to capture as much of this advantaged crude,” Kemp said. During 2011 and 2012, East Coast refiners had the weakest margins in the country. They “had to be aggressive [in gaining rail capacity] because they had the high cost crudes,” he said.

At the end of 2012, an East Coast refinery saved $10-$15/b by running Bakken crude instead of a Brent-based light crude like West African Bonny Light, Kemp said. On March 21, Platts assessed the price of Bakken Blend crude at Clearbrook, Minnesota, at $92.41/b. The price of West African Bonny Light was $110.31/b, according to Platts.

Bakken crude will stay at a discount to an imported waterborne barrel. “It will be priced so that the refiner in the East Coast wants to run it instead of the Brent-based African barrel,” Auers said, noting that eventually Bakken crude will be priced in the East Coast instead of at its origin point.

But, as competition heats up between rail midstream developers, the price of Bakken will rise. “You are going to have competitive rail rates and that will increase the price of Bakken,” Auers said.

Since last year, Buckeye Partners, Global Partners and PBF Energy have constructed more than a combined 350,000 b/d of rail capacity along the East Coast market.

In the third quarter of 2013, Canadian pipeline operator Enbridge will open its Eddystone Rail project near Philadelphia. The project will initially handle 80,000 b/d, but will be expanded up to 160,000 b/d as early as mid-2014. Also in Q3, Plains All American Pipeline will bring into service a 130,000 b/d crude rail receiving terminal in Yorktown, Virginia, at its existing products terminal.

Next quarter, PBF Energy will double its capacity at its existing Delaware City, Delaware, facility to unload heavy sour crude to 80,000 b/d. In addition, Philadelphia Energy Solutions will next year complete a high-speed rail unloader at its 330,000 b/d refinery in Philadelphia, where inputs will slowly be ramped up to between 140,000 b/d and 180,000 b/d.–Bridget Hunsucker in Houston


Share this:
Facebook Twitter Email

All blog comments are moderated before being published.

There are no comment on this post yet.

Your Comment