US crude logistics straining despite transport reconfiguration

Despite a reconfiguration of crude-oil transportation, growing production from unconventional resources still strains logistics in North America as it reshapes crude pricing and refinery operations, according to Deutsche Bank Securities Inc.

In a Sept. 10 report, researchers Paul Sankey, David T. Clark, Silvio Micheloto, and Winnie Nip say pressure will build to allow US exports of crude oil, whether by ending the statutory prohibition now in place or by allowing “workarounds” in current export licensing.

The transportation revamp, which began about mid-2012 and will be largely complete by mid-2015, involves more than 80 major pipeline projects with total combined capacity exceeding 16 million b/d. It responds to the surge in production of light oil from low-permeability formations and of blended and upgraded bitumen from the Canadian oil sands, supplies of which have slashed requirements for imported crudes at US refineries.

Although other pipeline projects will remain in progress after mid-2015, the system by then will have become “highly efficient,” the researchers say, meaning it will provide “the ability to arbitrage away short-term price aberrations.”

Pipeline capacity newly opened to carry crude from the hub at Cushing, Okla., to Gulf Coast refineries has eased one such aberration: the discount of West Texas Intermediate to Brent Blend crude, which at times during 2011-13 exceeded $20/bbl.

“Those days are over now,” the researchers say, adding that by the end of next year’s first quarter pipeline capacity will be adequate at all transport centers important to WTI crude—Cushing, the Permian basin, Houston, Port Arthur, Tex., and St. James, La. Key projects are the Keystone XL southern leg, Seaway twin, Houma-to-Houston (Ho-Ho) reversal, and ramp-up to capacity of Permian-Gulf Coast pipelines.

For the next few months, the researchers say, the US will import about 700,000 b/d of light crude, about 300,000 b/d of it on the Gulf Coast.  During the next 12 months, however, North American supply of light crude will increase by 700,000 b/d, “so conceptually the continent will self-supply in terms of light by mid-2014,” the researchers say.

Prices and production

The price of domestically produced light crude then will come under increasing pressure, selling at a widening discount to international crudes of similar quality.

As transport reconfiguration finishes south of Cushing and US production of light crude increases further, refiners will require a discount to justify adjustments to crude slates and equipment allowing increased processing of light feedstock.

“If the crude export ban stays in place and is enforced, and if meaningful supply growth continues, eventually the surplus will force prices down to the marginal cost of production in the unconventional basins until production rationalizes—or the crude export ban is revised or lifted,” the Deutsche Bank analysts say. They estimate the marginal price in parts of the Bakken play at $75-80/bbl.

The Brent-WTI spread will remain important because product trading is linked to Brent. But relationships between Louisiana Light Sweet and WTI crudes and between values at Cushing and Houston will be increasingly influential, with crude flows dictated by prices at St. James, Cushing, and Houston.

Deutsche Bank expects overall production increases in North America to be 1.1 million b/d this year, less than 1 million b/d in 2014, and less than 900,000 b/d in 2015. Canadian growth will increase in the mix each year. Later in the decade, the researchers predict, production will quit growing in the Bakken and Eagle Ford plays, but Canadian growth will continue.

By the end of the decade, the researchers expect North American production to approach 14.5 million b/d of crude, with the US accounting for more than 9 million b/d.

Hunger for heavy

The researchers describe Gulf Coast refiners as “hungry for more heavy crude” as Mexican and Venezuelan supplies decline and requirements increase for light-heavy blending in response to the light-supply surge.

Pipeline capacity allowing Canadian heavy material to reach the Gulf Coast will become “meaningful” next year, they say—slightly more than 500,000 b/d. Although that capacity will jump to more than 1 million b/d in the next 2 years, refineries in the Midcontinent and Western Canada will absorb 1.7 million b/d of Canadian supply.

Gulf Coast refineries, with coking capacity of about 1.6 million b/d, run about 2.3 million b/d of 25° gravity or heavier crude. They could run heavy crude at amounts 2-2.5 times their coking capacity, the researchers said, adding they expect Gulf Coast refiners to increase heavy crude runs because of increasing access to Canadian supplies and the need to blend heavy with growing amounts of discounted light crude produced in the US.

“If Gulf Coast refiners don’t adjust their slate as much as we think and keep running 2.3-2.5 million b/d of heavy, Canadian heavy will shove out Venezuelan and other heavies (Colombia, Brazil, etc.), leaving the market to Canadian and Maya,” the researchers say, adding the Mayan share eventually will decline.

The Deutsche Bank researchers note a “very important difference” between markets for light and heavy crudes in the US.

“While the light market is disengaging from the global market and the pricing dynamics will largely be determined with the ‘bubble,’ heavy and medium-sour crudes remain fully engaged with the global market because the US will continue to import large amounts of those grades,” they say.

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