A new Gulf Coast paradigm

Dec. 1, 2014
Following the reversal of Seaway Crude Pipeline System in 2012, a series of projects both in oil pipelines and storage has unlocked the crude oil bottleneck at Cushing, Okla., and connected the Gulf Coast-where nearly 47% of the US refining capacity resides-back to the Canadian, Midcontinent, and West Texas production centers on a massive scale.

Following the reversal of Seaway Crude Pipeline System in 2012, a series of projects both in oil pipelines and storage has unlocked the crude oil bottleneck at Cushing, Okla., and connected the Gulf Coast-where nearly 47% of the US refining capacity resides-back to the Canadian, Midcontinent, and West Texas production centers on a massive scale.

Key pipelines are moving crude to multiple destinations on the Gulf Coast. Recent pipeline completions have connected unconventional production in the Permian basin to Houston and Nederland, Tex. Shale oil from the Bakken is finding its way to St. James, La., and Eagle Ford-only 100 miles west from the Gulf Coast refining complex-is sending its oil to Corpus Christi, Tex., and Houston. The completion of the Seaway pipeline reversal and the 485-mile Gulf Coast Project pipeline by TransCanada Corp. are bringing more Western Canadian Select (WCS) crude to Houston and Beaumont, Tex.

Fractured market

This unprecedented build-out is vast and complex. With the rise of new crude supply sources and destinations, the paradigm of the Gulf Coast oil market is being shifted. According to a recently released white paper by Genscape, a Louisville, Ky.-based energy research firm, the new landscape may have led to the emergence of a "fractured" Gulf Coast crude market.

"This expansion in crude infrastructure has simultaneously reshaped the Gulf Coast spot market, isolating individual refining centers on the Gulf Coast from each other-each location with its own unique and opaque supply-demand fundamentals," Genscape said.

As noted in Genscape's report, "An Inside Look at the Gulf Coast Infrastructure and Supply Chain," each of these markets-Corpus Christi, Houston, and Beaumont-is receiving a variety of different crude grades at different volumes. There is some connectivity via waterborne movements of crude from Texas markets to Louisiana and the Ho-Ho line, but these connections are also very limited.

Rather than a homogeneous "WTI-Cushing" spot market, or a crude blending market like Louisiana Light Sweet (LLS), separate spot markets have developed in each of these centers. Crude grades have traded at severe discounts compared with their economic values due to logistical constraints and mismatches between incoming barrels and local refining capacities.

Storage issues come second. To accommodate the influx of crude oil, more than 10 million bbl of new storage capacity in the Gulf Coast has been constructed since 2013, and more than 15 million bbl of capacity is under construction, with 19 million bbl of proposed storage capacity potentially coming online by 2017, Genscape said.

However, these new Gulf Coast storage terminals, unlike traditional storage centers as Cushing, St. James, or Patoka, are widely spread in geography. "Because of this, Gulf Coast storage operators will have a difficult time balancing inventories during refinery turnaround season and pipeline disruptions due to limited connectivity and available capacity," Genscape said.

Challenged benchmarks

Years ago, the US's reliance on imports of foreign crude made the incremental supply of oil relatively transparent. Gulf Coast refiners competed equally with each other and Midcontinent refiners for the same pool of incremental crude oil imports.

Now, as the Gulf Coast is being connected back to the recent US oil production boom, its link with the global oil market is decaying. The export ban remains intact while crude imports have dropped dramatically. This, coupled with the vast yet splintered expansion in crude transportation pathways, has broken the former unification of the Gulf Coast refining center as one "holistic" spot market.

"There is no longer unified competition for supply among Gulf Coast refiners," Genscape said. It points out that the current aggregate market fundamental benchmarks, including the US Energy Information Agency's PADD 3 weekly crude inventories and PADD 3 weekly crude imports, do not tell the whole story or provide insight into what is happening in those emerging market centers.

Therefore, developing granular market-level data on localized supply-demand, grades, and storage is essential to improving market efficiency and spurring a changed but more dynamic Gulf Coast crude market.