INLAND DEMAND FOR CRUDE WILL STRAIN CAPACITY OF U.S. GULF COAST-MIDWEST LINES

A.D. Koen
Gulf Coast News Editor

Without crude oil pipeline expansions in the U.S. during the 1990s, demand inland for waterborne oil imports will surpass line capacities.

Most in need of more capacity will be pipeline systems delivering crude to refiners in Petroleum Administration for Defense (PADD) Dist. II, from U.S. Gulf Coast ports in PADD III.

PADD II covers the Midcontinent, Midwest, and Upper Midwest, PADD III essentially the Texas-Alabama coast.

Coastal crude markets will not be affected by shortages of pipeline capacity.

A study by Purvin & Gertz Inc., Houston, shows that supply patterns in PADD II have been evolving toward more reliance on waterborne imports since 1985, when refiners there bought an average 170,000 b/d in that category, or about 6% of PADD 11 demand. By 1989, about 620,000 b/d of waterborne crude was entering PADD II, or 21.3% of demand.

Total U.S. inland crude production declined an estimated 800,000 b/d in 1985-1989, while refinery runs in the U.S. were increasing by 200,000 b/d.

U.S. supplies to PADD II fell by 350,000 b/d in 1985-1989, while PADD II refinery runs increased by 160,000 b/d Imports from Canada made up some of the shortfall, contributing an incremental 70,000 b/d. But it was waterborne imports that mainly brought the ledger into balance.

So far, capacities of pipelines delivering crude to PADD II refiners have been more than adequate. Also, some crude pipeline companies have reversed the flow of certain lines, making them capable of PADD III to PADD II deliveries in anticipation of a growing need to move waterborne supplies inland.

For example, ARCO Pipe Line Co. began in April 1988 delivering 50,000 b/d of crude oil from the Texas Gulf Coast to the transportation hub at Cushing, Okla., by reversing its Houston-Wichita Falls, Tex., pipeline system.

"Deliveries south to Houston had dwindled to where we had very little southbound movement on the system," says Tom Thomas, marketing manager of ARCO Pipe Line.

Earlier this year, a reversal by Texaco Pipeline Inc. allowed it to begin moving 50,000 b/d of crude from the Houston area through Corsicana, Tex., to Wichita Falls.

Expanding pipeline capacity with new construction isn't being considered an economic solution to the need for more throughput for imported crude during the 1990s.

CONTINUING DECLINE

There is widespread agreement that more imported crude will be needed.

U.S. crude supplies are expected to continue declining well past the end of the century, while gasoline demand and refinery runs remain constant. As in the past 5 years, waterborne imports are considered the only way of making up supply shortfalls.

Purvin & Gertz believes reliance by PADD II refiners on waterborne imports is likely to double by 2000 to 1.24 million b/d, or about 41.2% of demand. At the same time, net transfers into PADD II of U.S. production in other PADDs will fall to about 830,000 b/d, while imports from Canada will stay constant at about 500,000 b/d.

Together, waterborne imports and transfers will account for about 2.07 million b/d of PADD II crude supplies by 2000. That will exceed by far current pipeline capacity into PADD II, estimated at about 1.4 million b/d by several consultants and pipeline companies.

Another study of U.S. crude markets, released last September, agreed that flat demand and declining U.S. production will increase the need for imported supplies and for transportation to move imports to inland market.

Commissioned by Amoco Pipeline Co. on behalf of a group of 23 oil and oil related companies, the study found that without further expansions by 1993 existing pipeline systems will fall short by about 158,000 b/d of having enough capacity to deliver all the imported crude required by PADD II.

Without additions of pipeline capacity by 1995, the study estimates, the PADD III to PADD II transportation shortfall will be about 364,000 b/d and by 2000 about 553,000 b/d.

Supplies can be balanced somewhat by deliveries from PADD IV and Canada. But a large diameter pipeline will be needed to move crude into the grid at Cushing, the study says.

FUTURE EXPANSIONS

The future need of moving larger volumes of imported crude has pipelines serving PADD II markets planning further expansions of capacities.

ARCO is working on the first phase of a two phase project to boost northbound capacity of its line.

With completion of Phase 1, ARCO will be able to move as much as 120,000 b/d of crude into the Cushing area. Completion of Phase 2 will increase capacity to nearly 200,000 b/d.

ARCO expects to achieve capacity of 90,000-95,000 b/d in February 1991.

Similarly, Texaco plans to increase its inter PADD pipeline capacity by as much as 70,000 b/d.

The growing need for waterborne imports in PADD II has Phillips Pipe Line Co. considering a reversal of Seaway pipeline, a plan which also would convert the line back to crude deliveries.

Phillips also is leading a group of companies studying revived plans for a deepwater oil port off Texas.

Positioned 27 miles off Freeport, Tex., in 110 ft of water, Texas Offshore Oil Port (Texport) would be able to receive as much as 2 million b/d of crude from ultralarge crude carriers and deliver it to an onshore storage terminal (OGJ, Sept. 17, p. 38).

Seaway pipeline, a 30 in. line stretching 500 miles between Freeport and Cushing, would be a natural carrier for crude imports landed at Texport.

Originally a crude pipeline, after it went on stream in October 1976 Seaway could move 300,000 b/d of crude oil to refiners in PADD 11.

But sagging consumption and the temporary arrest of declines in U.S. production caused demand for imported crude oil to ease off. And about a decade ago, low utilization forced Phillips to reverse Seaway's flow and convert the line to natural gas service.

Jim Stephens, joint interest manager of Phillips Pipe Line, says if Seaway were reversed again, it would be capable at first of moving about 200,000 b/d of crude into Cushing. Doubling the number of Seaway pump stations to 12 would enable Phillips to increase capacity to 600,000 b/d.

"We believe that would fulfill the industry's need for crude transportation capacity inland for several years down the pike," Stephens says.

CAPLINE PERSPECTIVE

Officials at Capline, with capacity of 1.1 million b/d the largest pipeline delivering crude from PADD III into PADD II, have kept a close eye on the speed with which world events can cause changes in crude pipeline throughputs.

Like other pipelines serving PADD II, Capline has been considering whether existing system capacity will be sufficient to supply inland demand for imported crude.

"The next expansion of Capline would be very expensive," one Capline official says.

About one third of current Capline throughput comes from tanker deliveries at St. James, La., and one third from Locap pipeline delivering crude from Louisiana Offshore Oil Port. The remaining one third is offloaded from barges at St. James or delivered from other pipeline systems in northern Louisiana or in Liberty, Miss.

During the past 2 years, Capline throughput has hovered near 100% of capacity during peak summer driving seasons and beyond. But so far, the line hasn't been forced to prorate capacity.

"It's come close and then dropped off in the wintertime," a Capline official says.

Capline believes there is enough pipeline capacity out of Cushing to supply incremental supply needs of Midwest refiners. The bottleneck, if one develops, will occur on systems moving crude into Cushing.

During the 1990s, Capline has concluded, there are enough competing routes to fill incremental needs.

Serving Midwest crude markets in the 1990s will require Capline to run at capacity beyond traditional periods of peak demand, as it has the past 2 years.

When shortfalls occur in Midwest crude markets, they will be relieved by pipelines delivering supplies into the Midwest through Cushing, Capline believes.

Capline believes its attractive tariffs assure that it will be the carrier of choice for crude entering the Midwest from the Gulf Coast. Also, a Capline official asserts, system throughput will be augmented by further discoveries in the Gulf of Mexico.

MIDDLE EAST CRISIS

ARCO's PADD III to PADD II crude pipeline also has experienced near capacity throughput during the past two summers.

"That started in January-a lot earlier than we expected," says ARCO's Thomas.

When Iraq invaded Kuwait on Aug. 2, he says, "The whole market turned around, to the point that imported crude was priced higher than U.S. crude."

Coupled with crude stocks above the 5 year average, the sudden increase in crude import prices began to discourage purchases of non-U.S. oil, and supply movements from Houston to Cushing began dropping.

By early December, northbound throughput on ARCO's line was virtually lost, Thomas says, "although nominations are starting to pick back UP."

Long term, Thomas and other pipeline officials say, the crisis in the Middle East won't have a significant effect on the logistics of supplying PADD II refiners.

"Obviously, other OPEC members have stepped up production to meet the needs of the world," Thomas says.

"But if there's a big war or something, who knows?"

If pipeline throughput into PADD II has been affected by the most recent Middle East crisis, Thomas says, by summer 1991 markets should be back to normal.

"Our capacity will be at least 120,000 b/d by then," he says, "and I suspect we could very well see nominations at that level."

UTILIZATION LOGISTICS

Phillips' Stephens says the Seaway reversal and construction of Texport are considered separate projects. Either could occur without the other.

Bases of the two ideas, while related, aren't identical.

Ideas for Texport were revived partly because of fears of future significant environmental restrictions on lightering crude oil in the Gulf of Mexico. Also, U.S. ports are likely to become more congested with tanker traffic, increasing risks of accidents.

For Texport crude supplies to serve refineries in PADD II, Phillips either would have to lay a large diameter line between Texport's terminal and Texas City, Tex., or to the Department of Energy's 40 in. line at Bryan Mound, which ties into ARCO's terminal in Texas City.

By tying into the pipeline grid at Texas City, Texport could sell crude to refineries in the Houston area and Baytown, Tex., and indirectly as far as Port Arthur and Beaumont, Tex., and Lake Charles, La.

"They probably would have a different slate of users," Stephens says of the two regions. "Texport would need a wider slate of crudes to serve Upper Midcontinent refiners as well as refiners on the Texas Gulf Coast.

"But there is a lot of synergism there."

Stephens thinks it is unlikely that some other pipeline reversals being considered will take place because some crude slates either aren't as valuable to inland refiners as they are on the Gulf Coast or might not fit the needs of other refineries.

"Once a refinery has been configured to process a specific slate of crude, another supply might not be as efficient a feedstock," Stephens says.

"There might be economic penalties not readily apparent in reversing a line that brings proprietary crude to a proprietary refinery."

Ownership of crude oil or pipelines, as well as supply origin and destination, also affect utilization of pipeline capacity.

A shipper fills capacity first on systems in which he has an interest, despite levels of competing tariffs.

For example, Phillips would tend to ship crude on Seaway, if capacity were available, because the return it would receive on tariffs would make that option more economic than shipping on Capline.

Companies contemplating reversals have a significant strategic advantage over companies that would increase pipeline capacity through new construction.

Reversals can be carried out faster than most pipeline construction projects. Less lead time is needed for planning and permitting.

"Pipeline construction can be very capital intensive," a Capline official points out. "It's hard to commit a lot of capital to a new pipeline project if there's not a good guarantee that somebody else won't try a system reversal and steal the advantage."

If Phillips proceeds with plans to return Seaway pipeline to PADD II crude deliveries, thereby adding capacity of 300,000-600,000 b/d, and ARCO completes its project to increase inland bound crude capacity by 150,000 b/d, the two companies would be able to deliver significant new supplies to refiners in the Midcontinent and Midwest.

"Frankly, those systems could serve the needs for crude transportation into PADD II well into the 1990s," Thomas says.

Although he acknowledges that ARCO's reversal was somewhat ahead of the market, Thomas says the conclusions of studies by other companies confirm that ARCO is on the right track.

"Reversing our line to move crude into PADD II gave Midcontinent refiners time to experiment on a spot basis with different foreign crude to see how they would perform in their refineries," Thomas says.

"We feel we've done the right thing by trying to put ourselves into that position.