North America Logistics Review Report – April 2016 Overview Section
Crude Prices Rise Despite Continued Inventories Build
For the week ending April 29, 2016, crude inventories in the U.S. totaled 543.4 million barrels–“historically high levels for this time of year” and constituting a 13.5 million barrel increase from April 1, 2016. During the month of April, EIA also published its monthly Short-Term Energy Outlook (STEO) with price projections for the next two years:
| West Texas Intermediate Oil Price ($/bbl) | 2016 | 2017 |
| EIA Short-term Energy Outlook | $35 | $41 |
From the prior month’s STEO, these prices represent an upward revision of $1 per barrel in both 2016 and 2017. While inventories continued to build during the month and the EIA pricing projections for the next two years broadly reflect the notion of “lower for longer”, crude oil prices reached $45 per barrel during the first week of May. Beyond other factors, wildfires in Alberta have brought over one million barrels per day offline as several oil sands mines and pipelines have shutdown. “It is likely that the market will overreact,” said Jim Williams, analyst at WTRG Economics in London, Arkansas. “My worry is if the upgrader facilities that push out the bulk of the heavy Canadian crude to the U.S. get damaged. Then you have a big problem.” In early May, the blaze started to approach Suncor Energy’s operations in the Fort McMurray area but resulted in no damage to the facilities as firefighters held off the blaze southwest of the site. Furthermore, weather conditions are now expected to move the fire away from the site. In total, according IHS estimates, the wildfires cover an area twice the size of New York City and have led to roughly 40 percent of the region’s 2.5 million bpd of production being cut.
The rapid cutback of over 1 mbpd of production serves, though, as a stark warning of the potential consequences should such a reduction become sustained. Crude supply logistics, as well as economics, would clearly be impacted. PADD 2’s dependency on western Canadian crude is extremely high; according to the EIA some 2.4 mbpd average in January and February 2016 (65% of crude processed) with the only other foreign imports being around 40,000 b/d from Saudi Arabia. Deliveries from Cushing could provide some support but ‘old style’ increased imports via Capline would likely be a necessity (for as long as Capline is not reversed). In addition, western Canadian imports into PADD4 have been averaging 260,000 bpd, PADD3 350,000 bpd, PADD1 300,000 bpd and PADD5 170,000 bpd for a grand total of 3.5 mbpd US-wide. Thus, a sustained WCSB cutback, now or in the future, could have wide reaching crude flow implications.
Pipeline Updates
There were many pipeline project updates during the month of April. Marathon said that it will soon begin construction on a $250 million (50 mile) pipeline—dubbed the Cornerstone Project—to transport condensate from Cadiz, Ohio (Harrison County) to Marathon’s Canton refinery in Stark County, Ohio. Magellan Midstream and TransMontaigne announced that they intend to construct a new 150,000 bpd refined products pipeline to transport gasoline, diesel, propane, and condensate from Magellan’s Corpus Christi, Texas terminal to TransMontaigne’s Brownsville, Texas terminal. Located at the southern tip of Texas, Brownsville offers a convenient staging point for deliveries into Mexico, where the new Energy Reform is opening up the downstream/retail sector. Additionally, TransCanada held open houses with North Dakota landowners along the route of its proposed Upland Pipeline. The project aims to carry up to 300,000 bpd of Bakken crude from Williston, North Dakota to Moosomin, Saskatchewan or, alternatively, Cromer, Manitoba.
During the month of April, three open seasons were announced: Medallion Pipeline announced a binding open season on the fifth major expansion of its existing crude oil pipeline system in Texas, Rangeland Energy announced an open season on its 125,000 bpd Rangeland RIO Pipeline (from Southeast New Mexico to Midland, Texas), and Oasis Petroleum announced a binding open season for its proposed Johnson’s Corner Pipeline Project, a 19-mile (50,000 bpd capacity) in McKenzie County, North Dakota.
Several regulatory developments occurred with regard to pipeline projects: the Arkansas Health Dept. and others are objecting to the proposed route of the 200,000 bpd Diamond Pipeline through Arkansas and, separately, Extraction Oil & Gas, LLC (EOG) filed a “motion to intervene” and comments supporting the Petition for Declaratory Order filed by Grand Mesa Pipeline, LLC so that the pipeline can enter service in 4Q-2016. The Grand Mesa Pipeline is a proposed 150,000 bpd capacity pipeline that would transport crude from the Denver-Julesburg (DJ) Basin into Cushing, Oklahoma.
In Canada, Quebec suspended its request for an injunction against TransCanada’s $15.7 billion Energy East Pipeline after the company agreed to submit to the province’s environmental review process. The suspended injunction removes a hold-up in the regulatory approval process but also adds another environmental review to the approval process for the beleaguered mega project. Additionally, newly elected Canadian Prime Minister Justin Trudeau reiterated his stance against the currently proposed 525,000 bpd Northern Gateway Pipeline saying “the Great Bear rainforest is no place for a . . . crude pipeline.”
With regard to natural gas projects, New York Governor Andrew Cuomo’s administration rejected the Constitution Pipeline Company’s plan to build a 125 mile long natural gas pipeline from Susquehanna County, PA to Schoharie County, NY. Next year, the Delaware River Basin Commission (DRBC) will do an independent review of the PennEast pipeline—planned to move 1,107 MMscf/d of Marcellus Shale natural gas from Pennsylvania to New Jersey utilities—because of a “high level of interest” in the pipeline project. Also, the Garden State (New Jersey) Expansion Project is moving forward after the project received FERC approval this past month. The project involves adding and modifying compressor stations but includes no modification to the actual pipeline. The Tennessee Gas Pipeline or TGP (subsidiary of Kinder Morgan) announced that it has suspended its work on a $3.3 billion natural gas pipeline—dubbed the Northeast Energy Direct Pipeline—due to an uncertain regulatory climate and a lack of commitments from New England power generators. Additionally, FERC released Draft Environmental Impact Statements (EIS) for two pipeline projects by the Columbia Pipeline Group: the $1.4 billion Leach Xpress Project (southeastern Ohio and West Virginia and $400 million Rayne Xpress Expansion Project (Kentucky). Lastly, an administrative law judge with the California Public Utilities Commission has recommended that state regulators reject a $621 million proposed natural gas pipeline by SoCalGas.
Rail and Terminals Update
Vancouver Energy, a joint venture between Savage Companies and Tesoro Corporation, recently received an extension by at least 8 months for the permitting and early termination deadline on the company’s planned Vancouver, Washington terminal project. The 8-month extension is shorter than that proposed by Vancouver Energy but longer than what was desired by terminal opponents. In Benicia, California, the City Council has postponed till September 20, 2016 a decision on Valero’s proposed crude-by-rail terminal at the company’s Benicia refinery because several members of the City Council stated that they need more information to make a decision on the project. Also, no decision has been made on the Phillips 66 proposed crude-by-rail project at its Santa Maria refinery in California: the San Luis Obispo County Planning Commission, the organization charged with providing or denying permits for the project, has scheduled the sixth (and potentially final) day of hearings for the project on May 16, 2016. Lastly, a small rail hub, NiCon (Niobrara Connector) has opened up in the heart of the Denver-Julesburg (DJ) Basin, just south of Evans, Colorado. Beyond the ability to move other products, the hub is able to ship out 25 rail cars (17,500 bpd) of crude daily.