Limited market access still impedes Rockies oil prices

June 12, 2006
The US House Energy and Commerce Committee’s hearing last month ostensibly was about gasoline supplies, prices, and formulations.

The US House Energy and Commerce Committee’s hearing last month ostensibly was about gasoline supplies, prices, and formulations. But Rep. Mary Bono (R-Calif.) directed her inquiry further upstream.

“If you talk to some of our domestic producers, you learn that they’re receiving as little as $22/bbl when the world price is more than $70/bbl,” she said.

Bono then asked one of the witnesses, US Energy Information Administration Deputy Administrator Howard K. Gruenspecht, if US oil producers are limited in their choices of customers. He responded that factors from refinery maintenance to crude type can affect what a producer receives.

“It’s not just transportation. The spread between light and heavy oil had been as narrow as $2-3/bbl and is now much higher. Someone who produces light oils is getting more than someone who produces heavier ones, not only domestically but around the world,” Gruenspecht said.

Bono pursued her point. “It’s hard to get sympathy in this business. But domestic producers say they’re not getting money to reinvest and produce more oil. Their spreads also keep changing, which make this harder,” she said.

Rep. Barbara Cubin (R-Wyo.) noted that several weeks earlier she asked EIA Administrator Guy Caruso why Wyoming gasoline prices don’t reflect the low prices received by oil producers in the state. Gruenspecht responded that EIA was looking into the matter.

Oil produced in Wyoming is similar in quality to production in Louisiana and Oklahoma, yet Wyoming producers are getting less, Cubin said. “This has been going on for an extremely long time,” she added.

The Interstate Oil & Gas Compact Commission has formed an oil price differentials taskforce, which is gathering information and expects to issue a final report in October.

Differential widened

Regional oil and gas trade associations confirmed that Rocky Mountain crude oil producers, who historically have contended with a price differential, have seen the gap widen in recent months.

“It’s a regional situation that has arisen where some producers, for various reasons including transportation and refining capacity, are receiving significantly less for home-grown barrels of oil. In some cases, the differential is as high as $30,” said Andrew Bremner, government affairs director at the Independent Petroleum Association of Mountain States in Denver.

He told OGJ that the problem is “somewhat widespread.” He said: “A Denver refinery shut down for maintenance and then had a fire, so it lost about two thirds of its capacity. With a lot of oil that was being produced, there wasn’t capacity to receive it. Now that the refinery is back up and running, the differential has come down.”

Ron Ness, president of the North Dakota Petroleum Council in Bismarck, added: “There have been discounts this spring of up to $29-30/bbl. That is not the vast majority of our oil, but it is a significant portion of it. Every operator has a different contract and a different way of marketing their oil. It varies greatly.”

Bremner confirmed that contract terms vary, with some based on the price of West Texas Intermediate at Cushing, Tex., and others on prices at the New York Mercantile Exchange. “I heard about one contract based on the NYMEX price minus $30. In a very few cases, some people aren’t drilling wells because the differential has been so great that it wasn’t worth it,” he said.

Refinery capabilities also can pose problems. Even though there are five refineries in the Salt Lake area with capacities ranging from 10,250 b/d to 55,000 b/d, producers in Eastern Utah aren’t finding a ready market there for their black, waxy crude.

“Utah crudes account for only about 15% of what the Salt Lake area refineries run,” said Lee J. Peacock, president of the Utah Petroleum Association in Salt Lake City. “We import the rest from surrounding states and Canada. It’s a major issue for Utah producers. But for refiners and retail customers, there’s adequate crude.” The region also gets about 55,000 b/d of products by pipeline from Wyoming, he said.

“Part of the issue is that the black, waxy crude demands a specific refining process. Since this issue has flared up, there’s been speculation that a new refinery would have to be built specifically to handle this,” Peacock said.

He said none of the Salt Lake area refineries has announced an expansion, even though each is operating at or near capacity. “There are ongoing modification projects to create new products, currently low-sulfur diesel fuel. That’s where they’re spending their money,” he said.

Some improvement

The situation has improved somewhat for eastern Rocky Mountain oil producers recently, other association officials said. Ness noted that the Suncor Inc. refinery near Denver is back at its full 90,000 b/d of throughput capacity. Tesoro Corp.’s plant at Mandan, ND, also has returned to its full capacity of 60,000 b/d following an additional 10-day turnaround, he said.

Enbridge’s North Dakota pipeline division also has announced that it will move forward on a $70 million expansion to add 15,000 b/d of eastbound capacity, he said. The company also is considering reversing another line that brought Canadian crude into North Dakota so that crude oil could move north from the state into Saskatchewan, where it would feed into a line serving Chicago, Ness said.

Upper Midwest refiners also are experiencing strong demand for their products, and pipelines can transport more crude during the summer, he continued. “In the short term, we expect better markets for our crude. In the long term, we need to find more export markets for it,” he said.

Additional pipeline capacity also is the key to improving prices for Wyoming’s crude oil producers. Bryan Hassler, executive director of the Wyoming Natural Gas Pipeline Authority in Casper (which also handles crude pipeline issues), has held discussions with representatives of Kinder Morgan Inc. about reconverting a gas pipeline to handle crude.

The line was converted to gas in about 1997 when it was owned by Terasen Inc., which Kinder Morgan acquired for $5.6 billion in November. Hassler said some of the gas contracts on it run through 2011, but added that KMI could accommodate them on its Rockies Express pipeline, which is scheduled to be in service to Ohio by 2009.

He calculates that the Terasen gas pipeline’s contracts have an undiscounted value of about $123 million from Jan. 1, 2007, through 2011. “A company could purchase those from KMI and alternately source them to the Kansas City market through other pipes that have available capacity,” he said.

“Add up to $134 million of estimated conversion costs and a payment to KMI for the system, say about $100 million, and the result would be another crude pipeline capable of shipping another 100,000 b/d out of the region in another 24-36 months for about $350 million,” Hassler said.

He said other possibilities include trying to build a crude oil pipeline alongside a natural gas liquids system for which Williams Cos. Inc. already has negotiated a right-of-way from the Rockies to Conway, Tex., and then work on getting the crude to Cushing.

“There also is a pair of grassroots proposals that could be combined into a single project,” he said. Still more proposals include Canadian crude, according to Hassler.

“Any crude that comes from this region and seeks markets in the Midcontinent will displace crude from elsewhere. Would we prefer to rely on Canadian crude instead of Middle Eastern crude? Probably. In the end, we’ll need it all,” he told OGJ.