Crude Imports from Canada continue to increase
Although the first three months of 2015 have shown some industry’s retraction due to sustained low crude prices, there are still plenty of developments which demonstrate the continued dynamism of the North America Crude Renaissance.
For example, EIA data show that crude imports from Canada continue to increase. EIA reports that 3.2 mbd of Canadian crude came into the U.S. in January 2015, a 12% increase over January 2014 and some 0.5 mbd above the level May/June 2014.
Part of this increment is supported by the start of two large pipeline projects at the end of 2014; Flanagan South and the Seaway Twin pipeline, the first with capacity to transport 600,000 bpd from Illinois to Oklahoma and the latter adding 450,000 bpd to the Seaway system from Cushing, OK to Texas.
Also, multiple regional pipeline projects continue to be announced; several of which are joint ventures between pipeline operators and refineries. For example, Delek Logistics Partners announced two joint ventures: one with Plains All American Pipeline to build the Caddo Pipeline (80,000 bpd capacity from Longview, TX to refineries in the Shreveport, Louisiana area) and another with Rangeland Energy to be part of the previously announced RIO Pipeline (55,000 bpd capacity from Loving Country, TX to Midland, TX). SemGroup also announced its Maurepas Pipelines project that will support Motiva’s Norco and Convent refineries.
As crude logistics continue in motion, state governments are concerned about the implications of these developments for their communities. For example, in Minnesota, a neighbor to both North Dakota and Canada, a multiagency report titled “Interagency Report on Oil Pipelines” was recently presented to Minnesota’s Environmental Quality Board in the hopes of guiding policy developments. Some of the most relevant findings of the report include considerations for the 2.7 mbd of Bakken and Canadian crude that pass through the state via pipeline and the 600,000 bpd of oil that move through by rail.
The Washington State Department of Ecology also released the results of its Marine and Rail Oil Transportation Study. The study assesses the risks of crude transportation by rail and vessel and presented recommendations.
In this first quarter of 2015, the crude by rail sector is confronted with what seems like an ever growing list of challenges. During February and March, four crude-by-rail accidents took place—two in the U.S. (West Virginia and Illinois) and two more in Canada (Ontario). One of the most alarming findings was that all of the accidents involved CPC-1232 tank cars, the type considered to be safer for crude transportation. The high volatility of the crude being transported and its propensity to simultaneously combust has become a primary concern for various stakeholders. The recent accident in West Virginia was characterized by reports noting the explosion of rail tankers into fireballs which rose more than 100 feet high.
After these rail accidents, several industry stakeholders are asking the Department of Transportation to include safety rules that contain specifications about vapor pressure limits for the safer transportation of crude by rail. Currently, this matter is being addressed at the state level, such as the North Dakota Industrial Commission (NDIC) recently enacting Oil Conditioning Order #25417 (effective April 1st, 2015). This order established an upper limit of 13.7 psi for the Reid Vapor Pressure of all North Dakota crude loaded onto rail cars. The rationale behind this decision was the belief that only Bakken crude presented these vapor pressure problems. Other government agencies are calling for this safe transportation issue to be addressed and various forms of legislation have been proposed such as the Crude-by-rail Safety Act of 2015 which aims to set stronger safety standards for trains moving volatile crude. At the same time, the National Transportation Safety Board (NTSB) is pressuring the President’s Administration to request the upgrading or replacement of rail cars used to move crude within 5 years.
Governmental authorities are not the only ones taking steps to address safety issues. BNSF sent a letter to its customers announcing that it will work with them to transition DOT-111 cars from shale crude service within a year and unmodified CPC-1232 within 3 years. BNSF will implement other safety measures immediately such as limiting train speeds in areas with populations over 100,000 people.
In Canada, Transport Canada announced a proposal to address the recent Ontario crude by rail accidents. The new safety standards address the car tanks themselves and include requirements for thicker steel, thermal protection, and full shields at each end. The date to phase out DOT-111 cars from transporting crude was established as May 1st, 2017 (unless the car is modified to new standards) with unmodified CPC-1232 cars to be phased out between July 2023 and May 2025. Some industry stakeholders are concerned that these measures do not address the vapor pressure volatility issue.
Finally, the U.S. Crude Exports debate will continue for the foreseeable future as multiple reports published during the first three months of the year show. For example, the Center for Strategic and International Studies (CSIS) presented its report “Delivering the Goods – Making the most of North America’s Evolving Oil Infrastructure” in which the topic of economic and security issues pertaining to crude export is analyzed.
Also, IHS published a report titled “Unleashing the Supply Chain: Assessing the Economic Impact of a U.S crude oil free trade policy” which examines job creation, both direct and in-direct, that would result from disbanding the U.S. Crude Export Ban.
The American Fuel & Petrochemical Manufacturers (AFPM) released the results of its study “Refining U.S Petroleum – A survey of U.S Refinery use of growing U.S. crude oil production” based on a survey that represents 61% of the refinery capacity in the country. The report cited that investments being made by U.S. refiners could enable approximately 730,000 bpd of additional domestic light crude to be absorbed by 2016. One of the main takeaways of the report is that demonstrates U.S. refiners’ ability to absorb the growing local super light production for the next several years.
The Center for Energy Studies at Rice University’s Baker Institute for Public Policy also released its study “The US Crude Oil Export Ban: Implications for Price and Energy Security.” The paper’s author, Kenneth Medlock, assesses a wide range of crude prices going from $30 to $150 dollars per barrel and asserts that, if crude exports are allowed, the majority of light tight oil produced from U.S. shale formations will command higher prices in the international market since this light tight oil is generally of a better quality than Brent and WTI.