Petrodollars: Tighter Brent-WTI spread raises new challenges for refiners

The wide Brent-WTI spread has meant enormous profits for US refiners lucky enough to take advantage of it. But it’s not as wide now, and that is bringing a new set of issues for those same companies. Janet McGurty looks at the issue in this week’s Oilgram News column, Petrodollars.


US refiners are being helped by what has been cheap shale oil and the WTI-Brent disconnect, but for how long?

With the first quarter results behind them, US independent refiners are basking in the benefits of the low-priced, “advantaged” crudes now that many pieces of the logistical puzzle have fallen into place, but are keeping an eye on whether changing circumstances will continue to boost profits.

The newness of using trains, barges and trucks has worn off and operations have been pretty well optimized and tailored to each refinery.

These days, the refiners are pretty savvy about getting the crude out of the prolific Bakken in North Dakota, and heavy crude from the oil sands of Alberta to their plants on the East and West Coasts, still in thrall to some degree to higher Brent-based crude import prices.

However, with a collapsing WTI-Brent spread and the ingenuity of logistical engineers, and refiners from all regions looking good — now it begs the question can this good fortune continue?

“US refiners have a large competitive moat from cheap crude, cheap natural gas, the ability to process cheap heavy crude and their economies of scale,” said Edward Westlake, head of the oil research team at Credit Suisse, adding he felt there was a risk that WTI-Brent spreads could compress as early as April 2013.

Many refiners are keeping an eye on the narrowing spread between Bakken and WTI, as well as WTI and Brent, and looking for ways to keep the margins strong.

While the second quarter is traditionally a better one for refiners, as warmer weather puts more drivers on the road, the improved shale oil logistics has helped to push up the price of “advantaged crude” by making it more available, which could shave some profit off results.

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According to PBF Energy, headed by refinery master Tom O’Malley, the company was paying at a $1.90/b discount to WTI for Bakken in the first quarter of 2013 versus a $12.48/b discount seen last year at its two East Coast refineries at Delaware City (190,000 b/d) and Paulsboro, New Jersey (160,000 b/d).

PBF has beefed up its rail offloading capacity at Delaware City, building a double-loop track that cuts down on costs by cutting down on unloading time for the crude, and will provide reduced transport costs from the current $12/b down to $4/b.

PBF is also bringing in heavy crude from Alberta which, due to the lack of logistics to move it out of Canada, is still holding a deep discount, with PBF paying an average of $26.62/b in the first quarter, not much changed from the year before.

US West Coast refiner Tesoro is also looking to take advantage of the heavy Canadian crude discount, and its proximity to the source makes it a much easier proposition, although it is not ignoring the advantage of moving Bakken to the west.

Having recently acquired BP’s Carson refinery, to be combined with its own 97,000 b/d Carson plant when the deal closes later this quarter, Tesoro is looking to back out the imported barrels based on Brent and Alaska North Slope pricing, and take advantage of the Bakken as well as the heavy Canadian crudes.

Teaming up is another way that refiners are looking ahead to keep a lid on transport costs in the face of rising prices in the “advantaged” crude arena.

Tesoro and supply chain operator Savage will develop and operate a 120,000 b/d crude by rail unloading and marine loading facility at the Port of Vancouver, Washington, Savage said.

Slated to be operational in 2014, the facility will have a potential near-term expansion capability of 280,000 b/d, the company said.

Under the agreement, Tesoro has the right to the first 60,000 b/d of throughput at the facility, which will have the ability to handle any type of crude and will hold the line on both marine and rail costs, the company said.

The Midcontinent has been the primary beneficiary of the shale oil discoveries. Both BP and Phillips 66 have spent massive amounts of money in upgrading their Whiting, Indiana and Wood River, Illinois, refineries respectively.

Smaller refiners like Western, who has two smallish refineries in Gallup, New Mexico and El Paso, Texas, are also reaping benefits of the WTI disconnect and shale oils, posting record first quarter earnings of $826 million earnings.

Located on the Permian Basin where reworking of old fields with new technology has increased production, Western took advantage of the benefits from the price differential between WTI Midland and WTI Cushing, the oil delivery point for the futures contract.

But changing logistics may buffer this trend going forward.

–Janet McGurty in New York

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  1. George at May 6, 2013 4:31 pm

    Your comment on PBF’s transportation costs dropping from $12 to $4 is erroneous.

    Per PBF’s management’s comments on the recent call, the $4 number is the estimated uplift from displacing existing seaborne crudes with Bakken crude. The double loop will reduce the $12 rail cost only “slightly.”


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