North America Logistics Review Report – May 2016 Overview Section
Prices Rise as Crude Oil Inventories Drop and Supply Disruptions occur in Canada and Africa
According to the EIA in its May Short-Term Energy Outlook, (STEO), during May, U.S. oil inventories decreased by 6.3 million barrels to 537.1 million barrels. Total U.S. gasoline inventories also decreased by 1.7 million barrels to 240.1 million. These reductions and recent supply disruptions contributed to a boost in crude oil prices, according to the EIA. However, this boost seemingly had little impact on the U.S. rig count which continues to fall. 33 oil rigs came offline in May, resulting in a mere 404 total oil rigs in service – the lowest rig count since the Baker Hughes rig count started in 1940.
The EIA also published updated price projections for the next two years.
|West Texas Intermediate Oil Price ($/bbl)||2016||2017|
|EIA Short-term Energy Outlook||$40||$51|
These prices represent upward revisions from those found in the prior month’s STEO: $35 in 2016 and $41 in 2017.
Supply disruptions were mostly to blame for the recent rise in crude prices. A massive wildfire in Alberta involved the evacuation of 8,000 oil workers and took over one million bpd of production offline. Though the wildfire “is not under control by any means” and it continues to increase its 2,180 sq. ft. scorch, says Alberta’s wildfire manager, the fire has not caused any major damage to the oil sands production areas. On May 23, the evacuations orders were lifted at all the worker camps in the Fort McMurray area. Producers in the oil sand-rich area have given varying accounts as to when production will be back online. Suncor, the largest crude producer in Canada, has stated it will resume operations before July 1st. The sudden one million bpd drop-off of Canadian crude left Midwest refineries scrambling for crude and resulted in some Midwest refineries sourcing crude from the 1.2 mbpd Capline pipeline.
Crude prices have also been lifted by production cuts in Libya and Nigeria. Continued political discord has caused Libya’s production to stay around 360,000 bpd, a fraction of its 1.5 mbpd capacity. Nigeria, the largest oil producer in Africa and sixth largest oil producer in the world, has been facing attacks by militant groups which are shutting down pipelines and production facilities. Production has been cut by nearly 50% from the start of 2016 to 1.1 mbpd says Nigerian National Petroleum Corporation. It remains to be seen whether these changes will materially impact U.S. imports and internal crude flows.
In the US, construction has begun on the $3.8 billion, 1,168-mile Dakota Access crude pipeline through North Dakota, South Dakota, Iowa and Illinois. However, permits have not yet been obtained for construction on 60 parcels under federal jurisdiction in Iowa. The Army Corps of Engineers says that the permits are likely 60 to 120 days away. To add to these complications, during the surveying of the proposed route in Iowa, an archaeological site was unearthed. The U.S. Fish and Wildlife Service has since revoked the construction permit for the site. Also, at least two lawsuits were filed in Iowa regarding Dakota Access’ ability to utilize eminent domain to obtain land for the pipeline.
Both of Enbridge’s Midwest pipelines, Sandpiper and Line 3 Extension, have undergone public hearings and continue to move forward in the regulation process.
In Canada, the National Energy Board recommended conditional approval for Kinder Morgan’s 715-mile Trans Mountain pipeline expansion (from 300,000 bpd to 890,000 bpd). The recommendation includes 157 conditions that Kinder Morgan must meet to construct and operate the pipeline; 49 of the conditions are environmentally related. The National Energy Board clearly stated “the benefits of the project would outweigh the residual burdens” and that the pipeline is in the “Canadian public interest.” The Canadian Federal government now has seven months to make a decision on the pipeline project. The Trans Mountain pipeline expansion project aims to transport crude Alberta’s oil sands to port near Vancouver, BC. The project is currently slated to enter service at the end of 2019.
Additionally, in Canada, Enbridge requested a three-year extension for its Northern Gateway Permit in order to enable greater legal and regulatory certainty as Enbridge solicits support from aboriginal communities. Enbridge’s current permit for the proposed 525,000 bpd Northern Gateway pipeline will expire in late 2016 if construction does not begin.
Pipeline Open Seasons Announced in May:
- Dakota Access Pipeline Connector, North Dakota – Savage Services (Oil)
- Alpha Connector, Texas – Alpha Crude (Oil)
- Trans Permian System Extension, Texas – Oryx Midstream (Oil)
- Dos Águilas project, Texas/Mexico – Águilas Pipeline Co. (Products)
- Rio Bravo Pipeline, Texas – NextDecade (Gas)
During the month of May, several developments occurred with regard to natural gas pipelines, specifically in the Marcellus region. In Pennsylvania, UGI Sunbury’s 35-mile long pipeline project received a certificate of public convenience and necessity from FERC. FERC also approved the 3-mile Cameron Interstate Pipeline Expansion Project in PA. Additionally, Williams Partners received a draft environmental approval from FERC for its 200-mile Atlantic Sunrise expansion pipeline project in Pennsylvania. Lastly, Energy Transfer Partners’ Trans-Pecos pipeline received approval from the FERC to cross the Rio Grande.
Pipelines which have applied for approval from FERC in May:
- Mountaineer Xpress pipeline, West Virginia – Columbia (Gas)
- Gulf Xpress Pipeline, West Virginia – Colombia (Gas)
- Eastern Shore Project, Pennsylvania – Chesapeake (Gas)
- Rio Bravo Pipeline, Texas – NextDecade (Gas)
Kinder Morgan withdrew its application to the Federal Energy Regulatory Commission for its 420-mile Northeast Energy Direct pipeline. The pipeline was proposed to transport Marcellus Shale gas from Pennsylvania through Massachusetts and New England. The withdrawal is due to insufficient contractual commitments as well as stiff opposition to its construction.
The San Luis Obispo County Planning Commission voted 3-2 against a motion that would have denied Philips 66’s rail project. A change in the terms of the planned project (from five trains per week down to three trains per week) helped clinch the vote to keep the project alive. Another hearing with the San Luis Obispo County Planning Commission is scheduled for September 22, 2016. If approval is received in a timely manner, construction is expected to begin in 2017 with the rail spur operational by 2018. The trains each have 80 rail cars and the capacity of hauling 53,000 barrels. The revised scope of the project involves bringing roughly 159,000 barrels per week of crude-by-rail into the Santa Maria refinery.
According to data published by the Association of American Railroads, crude oil rail shipments decreased by 44.1% in Q1-2016 compared to those from Q1-2015. During Q1-2016, the U.S. originated 63,361 carloads – a 49,828 carload decrease from Q1-2015, and a 21,664 decrease from Q4-2015.
New rules have been put into place in Washington State to increase oil-by-rail safety. The rules require that the transporting companies must demonstrate the ability to cover the cost of a “reasonable worst case spill.” These rules were set into place in order to protect the Washington taxpayers from paying for disaster clean-up due to the lack of insurance the transporting companies currently have. The rules state a reasonable worst case scenario would cost $400 per gallon to clean. Also, the rules mandate that the transporting companies to include financial information in its annual reports to the Washington Utilities and Transportation Commission. The rule is scheduled to go into effect in September.
On June 3rd, a 14-car derailment occurred to a Union Pacific Corp. train that was carrying Bakken crude to Washington. The incident ignited a fire and forced schools and about 100 residents to evacuate the area, as well as shut down Interstate 84. The Oregon derailment has heightened concerns of similar disasters occurring in the Pacific Northwest. The repercussions from this incident remain to be seen but they may include putting additional strain on comparable crude-by-rail projects and deliveries in the Pacific Northwest, California and elsewhere.