Crude prices – implications for logistics
December 2014 Overview from our North America Logistics Review Service – By way of update on last month’s commentary on crumbling crude oil export barriers, PEMEX is reportedly negotiating to receive US crude, the US Department of Commerce has released a regulation which eases re-export of foreign (read Canadian) crudes, this by allowing “incidental” contact between Canadian and US or other grades, inter alia opening up the potential for the blending of easier-to-export medium gravity crudes from condensate plus diluted bitumen, and Sprague Resources LP has bought the all of the equity interests in its Kildair subsidiary which recently spent $30 million, under-pinned by contracts with Suncor, on its Sorel-Tracey, Quebec, terminal (on the St. Lawrence east of Montreal) to enable unit train offloading and to convert 1.1 million barrels of storage to crude oil service.
The continuing crude oil price slide is of course, though, the primary story. With WTI now sub $50/barrel and most forecasters in the $55-$75/bbl range for 2015, (the EIA in its January Short Term Energy Outlook has WTI averaging $54.58/bbl in 2015), a key question becomes – what is the outlook for US and Canadian crude oil production and – in turn – what are the potential impacts on North American logistics?
The exceptional dynamism of the US industry in rapidly developing tight oil resources looks to be throttling back with 2015 E&P capital budgets being cut by typically 25-50% depending on the company. For conventional production, this would equate to only limited short to medium term impact on production but the very high decline rates for tight oil, and the associated need to maintain drilling in order to sustain and grow production, imply that US production could start to slow in the latter part of 2015. In its December 2014 and January 2015 STEO’s, the EIA has projected US crude production will rise to 9.31 million bpd in 2015 from 8.67 average in 2014, still over 0.6 million bpd year-on-year increase.
In Canada, producers have also been announcing 2015 capital budget cuts but apparently with less impact on production, at least short term. Cenovus and Devon, for instance, are both projecting increases in production in 2015, despite capital expenditure reductions. Canadian Natural Resources Ltd. has likewise announced it will trim investment on new projects but nonetheless expects production growth of 7% in 2015. (One cited reason is that production expansion at its Horizon mine will cut per barrel operating expenses by at least $10CA from a current $37CA – Source: Wall Street Journal, January 13, 2015). Existing oil sands mines are reported as being able to make money at $30/barrel, efficient in situ production at slightly higher prices. In addition, oil sands production has no “decline curve” in the sense conventional and tight oil production do. Recent year on year supply growth in Canada has been averaging around 0.25 million bpd or around 7.5% annually. A drop to around 5-6% would still signify growth in the region of 0.2 million bpd.
All in all, the implication is that, in 2015, the logistics system will need to cope with a flattening profile for US production yet still moderate supply growth in both countries, a potential combined increase over 2014 somewhere in the range of 0.75 million bpd. What does that mean for the logistics system? 2014 witnessed major capacity expansions, notably of Seaway, TransCanada KXL southern leg, Eagle Ford takeaway and other pipelines, plus rail, to coastal markets. Exactly as was projected for 2015 by EnSys Crude Exports WORLD Modelling for the API in early 2014, one consequence of this swing to adequacy of outlet capacity has been a narrowing of Brent-WTI differentials to the $2-3/barrel range. Arguably the advent of substantial new infrastructure to take US crudes in volume to coastal and thus international markets has also been a key factor in the drop in crude prices.
Based on EnSys North America Logistics Review data, pipeline plus rail capacity to the coasts will continue to grow substantially in 2015. By the end of the year, nameplate pipeline plus rail capacity should be 1.4 million bpd on each of the US plus Canadian west and east coasts.
To this needs to be added over 6.5 million bpd of total nameplate capacity to reach the Gulf Coast via pipeline plus rail from the Eagle Ford, west and east Texas, Cushing, the Bakken and western Canada. In summary, pipeline capacity to deliver to and rail offloading capacity at US and Canadian coasts should total a staggering 9+ million bpd less than twelve months from now (See graph below).
This represents an increase of over 1.5 million bpd versus assessed late 2014 capacity to deliver to the coasts. Further rail expansions lead in 2015, with an additional 0.5 million bpd nameplate projected to start up on the West Coast and 0.6 million bpd on the Gulf Coast. (Loading capacity increases are projected at more than 0.9 million bpd, around 0.56 million bpd in western Canada and the rest spread between the Bakken and other US regions.) In the US, some 0.4 million bpd of new pipeline capacity to take Eagle Ford crude and condensate to the Gulf Coast is scheduled to come on stream plus supporting inland takeaway capacity. In addition, in western Canada, the new 36 inch Enbridge Edmonton to Hardisty Mainline pipeline should be on stream during the first quarter of 2015 and some 0.7 million bpd of new pipelines to link production to major hubs by late 2015.
Even allowing for effective availability that is well below nameplate for rail terminals, in 2015, new capacity to the coasts should run well in excess of a potential 0.75 million bpd of new US plus Canadian crude oil production. So we continue to shift from a situation of dire lack of infrastructure to adequacy and now to surplus with increasing choice over where crudes go.
In addition to crude-by-rail continuing to add much of the new capacity to coasts in 2015, current crude oil price reductions could contribute to a shift in the pipeline – rail competitive balance. While lower crude prices arguably will have little impact on pipeline tariff rates, the drop to date of around $1 per gallon in retail diesel prices should translate into something of the order of a 7.5% reduction in rail freight charges. For a $15/bbl rail transit this equates to a reduction somewhat over a $1/bbl. Offsetting this, pending DOT rail safety regulations could, depending on their timing and specific requirements, add a broadly similar level of incremental cost, offsetting the fuel advantage.
The short term thus continues to look positive for adequacy of infrastructure to take crude to markets. Against this, the longer term contains greater uncertainty, especially with respect to the major pipeline projects through and out of western Canada. None out of Trans Mountain expansion, Northern Gateway, Energy East or Keystone XL has received approval; rather they continue to meet with resistance and potential delays. TransCanada has encountered a new issue related to protection of Beluga whales that could stymie its plans for an Energy East export terminal at Cacouna on the St. Lawrence River. Separately, just as the Nebraska Supreme Court removed a hurdle to Keystone XL in that state, so new road blocks appear to be developing in South Dakota where the June 2014 expiration of TransCanada’s permit has opened the door to a wide array of new petitions. The longer term ability to ensure sufficient WCSB pipeline takeaway infrastructure thus remains in doubt, potentially placing a growing burden on crude-by-rail.
EnSys North America Logistics Review Service includes four balances from which we are able to forecast the impacts of increase capacity of rail and pipeline projects in major US & Canada markets.