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Crude is reaching the coasts in increasing volume

October 2014 Overview from our North America Logistics Review Service – Current coastal crude-by-rail off-loading capacity has reached over 3.3 million bpd, (0.98 East Coast, 1.73 Gulf Coast, 0.66 West Coast) and is set to hit 4.5 million bpd by a year from now. Even though this capacity is not operating near nameplate, it is enabling some 1.5-2 million bpd to be delivered to the coasts today. To this new capability needs to be added the start-up of the Seaway twin, taking total capacity to 850,000 bpd, and the 700,000 bpd TransCanada Marketlink, both of which run from Cushing to the Gulf Coast; also continued expansions in pipeline capacity from West Texas and the Eagle Ford to the Corpus Christi and Houston areas.

The effect? US crude oils are now reaching the coasts in volume, impacting world oil markets, narrowing crude discounts and shifting inventories. From a 50 million barrel peak in May 2013, Cushing stocks have dropped to 20 million barrels – reversing what was a long upward trend – and doing so at a time when shell capacity has now reached 81 million barrels. Specific instances highlight the emerging new reality. A cargo of ANS was recently shipped to South Korea, movements of crude by rail then barge to California refineries, primarily via Vancouver, Washington, are increasing steadily; and Suncor intends to continue loadings onto tankers at its Montreal terminal for shipment to Europe and the Gulf Coast, with the intent to expand once the reversed Line 9 starts up.

Weekly Cushing, OK Ending Stocks excluding SPR of Crude Oil
Weekly Cushing, OK Ending Stocks excluding SPR of Crude Oil

 

In parallel, imports to the US of lighter crudes (> 35 API) have largely disappeared; with the next target some 2 million bpd of medium sour grades split roughly 50:50 between Saudi and other origins. Against this, US crude production increase has been running at around +1 million bpd per year of mainly very light crudes condensates and Western Canada at around +0.25 million bpd annually of primarily heavy/bitumen grades. One implication is yet further “loss of the middle”, i.e. of medium gravity crudes, in favor of lights and heavies; in turn expanded crude blending with all its consequences for managing potential incompatibilities.

US Crude Imports by API Gravity Range
US Crude Imports by API Gravity Range

 

US pipeline projects keep on coming – those in Canada move slowly

Projects continue to move ahead that will bring more crude from the US northern tier and potentially western Canada to Cushing and the Gulf Coast.

Magellan and Saddle Butte Pipeline II, LLC are completing an open season on the Saddlehorn Pipeline that would bring 400,000 bpd of Niobrara crudes to Cushing. Energy Transfer Partners and Phillips66 have active open seasons on the DAPL and ETCOP projects which would bring up to 570,000 bpd Bakken crude first to Patoka, (with a rail option to East Coast refineries), and thence to Nederland, Texas. The 240,000 initial, 350,000 bpd eventual capacity Pony Express pipeline from Montana and Wyoming to Cushing and the 585,000/880,000 bpd Flanagan South pipeline from near Chicago to Cushing are both in start-up, although throughput on the latter – and on the expanded Seaway – will reportedly be constrained until Alberta Clipper expansion comes on stream. In addition, the owners of Capline are reported to be studying options which could include reversal of the 1.2 million bpd line, possibly with a new line that would run north.
The Canadian side of the story is not so positive. Kinder Morgan has struggled to obtain permission to survey its proposed route for Trans Mountain expansion through Burnaby Mountain. Enbridge have stated they no longer expect to see Northern Gateway on stream in 2018, following NEB approval but with some 209 conditions, plus extensive resistance to the project. The NEB has challenged the adequacy of water crossing block valves on Enbridge’s Line 9 reversal, delaying completion into 2015. The Department of State is reviewing Enbidge’s planned expansion of the Alberta Clipper cross-border line from 450,000 to 800,000 bpd, an expansion once thought fully approved that now may not occur until 2016. TransCanada has submitted to the NEB its application for the 1.1 million bpd Energy East pipeline to Quebec and New Brunswick, but Keystone XL remains under State Department review – albeit with a new intensity of political activity following the mid-term elections.

Rail outlook active but uncertain

Uncertainty over pipeline projects out of western Canada raises the importance of the crude-by-rail takeaway capacity that is now building up rapidly in the region as a means to evacuate western Canadian crudes. Some 864,000 bpd nameplate capacity exists today rising to over 1.4 million bpd nameplate by 2015. However, the uncertainty over pipelines is being mirrored by uncertainties hanging over the outlook for rail.

In both countries, an array of new crude-by-rail safety regulations has been put forward, covering crude oil testing, operating speeds and rail car standards. A DOT Notice of Proposed Rule Making could move to a final rule early in 2015 but has engendered extensive debate over the timeframe for retirement or retrofitting of older DOT-111 tank cars; also the standards for new generation tank cars. However the details are resolved, the need to retire or retrofit large numbers of rail cars, (potentially some 40,000-70,000 tank cars out of around 90,000 which currently move flammable liquids), plus new speed and routing restrictions, is likely to raise rail movement costs and crimp crude-by-rail transit, at least in the shorter term. Related debates affecting crude-by-rail are playing out over operating standards for field crude oil conditioning equipment to ensure safe delivered crude, notably November 13th draft regulations from the North Dakota Industrial Commission, and standards for measuring crude oil volatility.

This month’s Overview draws in part on a presentation by Martin Tallett, President of EnSys Energy at the October 30-31 2014 joint COQA/CCQTA conference in San Francisco.

Learn more about how our North America Logistics Review helps you to stay up to date with the most relevant announcements in the US and Canada logistics arena.


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