A new chapter in the North American oil revolution is about to open on the Texas coast, with two major pipelines poised this summer to deliver an unprecedented influx of heavy Canadian crude to U.S. refineries
- and potentially beyond.
The anticipated startup of the Seaway Twin oil pipeline later this month will open the door for another 450,000 barrels per day (bpd) to flow from Cushing, Oklahoma, to oil tanks near Houston. A second line, Flanagan South, built at a cost of $2.6 billion, will start pumping even more Canadian crude from Illinois to Oklahoma.
They are part of a wave of investment that is reshaping the domestic crude oil market, reversing the flow of oil that traditionally moved inland from the coast and increasingly replacing imports from long-time suppliers Mexico and Venezuela, whose heavy crudes face growing competition from Canada's.
"There is a new landscape of connectivity coming for the second half of the year," said Michael Cohen, an analyst at Barclays in New York.
The one-two punch may land hardest on domestic crudes such as Southern Green Canyon, an offshore, medium grade delivered into Nederland, Texas. It may initially spare some rivals like Mars , which is traded in Louisiana, where new pipelines are slow to deliver Canadian oil.
The first jolt will come from the expansion of the Seaway pipeline, a 400-mile conduit that was reversed in 2012 to accommodate the unexpected flow of burgeoning Canadian and North Dakota crude in the north to refiners in the south.
In 2012, operators Enterprise Product Partnersand Enbridge Inc got commitments to more than double its capacity to a total 850,000 bpd with a $2 billion parallel line called the Seaway Twin or Loop. That should begin pumping by the end of this month, the company said this month.
Other projects will also offer new trading flexibility along the Houston Ship Channel, such as a 6 million barrel expansion of Enterprise's Echo storage terminal in early 2015, forcing market participants to grapple with shifting patterns, volatile prices and fluctuating stockpiles.
One question will be how much of the new oil ends up flowing overseas. The first known cargo of Canadian crude re-exported via the U.S. Gulf sailed for Spain a month ago out of the Freeport, Texas, terminus of the original Seaway line. [ID:nL1N0O00YS]
SGC VS MARS
To be sure, the Twin is capable of carrying a variety of crude oil from across North America, including the Midcontinent and the Bakken play in North Dakota, according to its website.
However, with surging production at the nearby Eagle Ford and Permian Basin plays already sating much Gulf Coast demand for lighter, sweeter crudes like Bakken, trading sources say the focus will be on shipments of Canadian crude instead.
Exports of Canadian crude directly to Texas have risen sharply this year, reaching a record of nearly 110,000 bpd in March, more than three times as much as in February, according to Energy Information Administration (EIA) data. But that's barely a trickle for Gulf Coast refiners, which churn out nearly half of America’s fuel, burning more than 7 million barrels of crude daily.
Traders say the Seaway Twin has almost enough committed shippers to run at full rates, although it won't likely run full in the near term until there is increased capacity to bring Canadian crude to the Midwest.
That will change in the third quarter, however, when Enbridge's nearly 600,000 bpd Flanagan South will connect the company's main Canadian export pipeline to Cushing. It will run 600 miles from Pontiac, Illinois.
"Seaway Twin is mostly going to be designed to bring Canadian barrels, which won't happen greatly until Flanagan starts up," said Sandy Fielden of RBN Energy consultancy.
The most immediate impact is likely to be felt on Southern Green Canyon (SGC), which is named for a region in the Gulf of Mexico and is produced by oil majors including BP Plc, Anadarko Petroleum Corp , Marathon Oil Corp and BHP Billiton Petroleum .
SGC production has risen recently, according to data on the Cameron Highway Oil Pipeline System (CHOPS), which delivers SGC to the coast. CHOPS pumped just over 190,000 bpd in the first quarter, double the rate of 2012, according to a Securities and Exchange Commission filing by operator Genesis Energy L.P.
SGC is comparable to Mars sourin quality: its API gravity is 0.6 points lower and its sulphur content is 0.5 percent weighted higher, according to an assay on BP's website.
But a major difference is location. SGC is delivered into Nederland, Texas, some 100 miles from the terminus of the Seaway Twin, while Mars is delivered into Clovelly, Louisiana.
SGC is already beginning to suffer by comparison. It traded as much as $1.90 a barrel above Mars crude in 2012, but cash prices have collapsed more recently as it faces competition from grades crude being pumped into the Houston area.
On the 30-day moving average, SGC has traded at a discount of as much $2.44 a barrel versus Mars, according to Reuters data, the biggest such discount since production began more than five years ago. Last Wednesday the discount was $3.13 a barrel, and traders expect demand for SGC to continue to weaken once the pipeline starts up.
THE SECOND BLOW
Seaway Twin is coming online at a moment of seismic change in the way excess domestic inventory is being distributed.
Until recently, inventory tended to pool up at Cushing, the delivery point for futures and the biggest hub of independent oil storage tanks. But with rising production in the north and new pipelines pumping oil all the way to the coast, the location of the growing domestic glut has shifted.
Cushing stocks fell recently to their lowest levels in six years, while stocks on the Gulf Coast rose to a record high at the start of May, according EIA data.
Adding to the flexibility of oil flows, a 95-mile, 30-inch-diameter lateral pipeline will soon connect the Echo storage and distribution terminal in south Houston to the Beaumont and Port Arthur, Texas, area, expanding the reach of WCS crude beyond Houston's refinery row.
As more heavy, sour crude flows east from Houston, more Mars is likely to be displaced, and eventually imports, particularly Mexican Mayan and Venezuelan, will be pushed out, Fielden said.
“Will they sell their barrels somewhere else? This will impact trade flows.”
Gulf Coast region imports of Mayan crude dropped to 67,233 bpd in May from 81,125 bpd a year earlier, according to data from PIERS available via Eikon.
Source: Reuters
- and potentially beyond.
The anticipated startup of the Seaway Twin oil pipeline later this month will open the door for another 450,000 barrels per day (bpd) to flow from Cushing, Oklahoma, to oil tanks near Houston. A second line, Flanagan South, built at a cost of $2.6 billion, will start pumping even more Canadian crude from Illinois to Oklahoma.
They are part of a wave of investment that is reshaping the domestic crude oil market, reversing the flow of oil that traditionally moved inland from the coast and increasingly replacing imports from long-time suppliers Mexico and Venezuela, whose heavy crudes face growing competition from Canada's.
"There is a new landscape of connectivity coming for the second half of the year," said Michael Cohen, an analyst at Barclays in New York.
The one-two punch may land hardest on domestic crudes such as Southern Green Canyon
The first jolt will come from the expansion of the Seaway pipeline, a 400-mile conduit that was reversed in 2012 to accommodate the unexpected flow of burgeoning Canadian and North Dakota crude in the north to refiners in the south.
In 2012, operators Enterprise Product Partners
Other projects will also offer new trading flexibility along the Houston Ship Channel, such as a 6 million barrel expansion of Enterprise's Echo storage terminal in early 2015, forcing market participants to grapple with shifting patterns, volatile prices and fluctuating stockpiles.
One question will be how much of the new oil ends up flowing overseas. The first known cargo of Canadian crude re-exported via the U.S. Gulf sailed for Spain a month ago out of the Freeport, Texas, terminus of the original Seaway line. [ID:nL1N0O00YS]
SGC VS MARS
To be sure, the Twin is capable of carrying a variety of crude oil from across North America, including the Midcontinent and the Bakken play in North Dakota, according to its website.
However, with surging production at the nearby Eagle Ford and Permian Basin plays already sating much Gulf Coast demand for lighter, sweeter crudes like Bakken, trading sources say the focus will be on shipments of Canadian crude instead.
Exports of Canadian crude directly to Texas have risen sharply this year, reaching a record of nearly 110,000 bpd in March, more than three times as much as in February, according to Energy Information Administration (EIA) data. But that's barely a trickle for Gulf Coast refiners, which churn out nearly half of America’s fuel, burning more than 7 million barrels of crude daily.
Traders say the Seaway Twin has almost enough committed shippers to run at full rates, although it won't likely run full in the near term until there is increased capacity to bring Canadian crude to the Midwest.
That will change in the third quarter, however, when Enbridge's nearly 600,000 bpd Flanagan South will connect the company's main Canadian export pipeline to Cushing. It will run 600 miles from Pontiac, Illinois.
"Seaway Twin is mostly going to be designed to bring Canadian barrels, which won't happen greatly until Flanagan starts up," said Sandy Fielden of RBN Energy consultancy.
The most immediate impact is likely to be felt on Southern Green Canyon (SGC), which is named for a region in the Gulf of Mexico and is produced by oil majors including BP Plc
SGC production has risen recently, according to data on the Cameron Highway Oil Pipeline System (CHOPS), which delivers SGC to the coast. CHOPS pumped just over 190,000 bpd in the first quarter, double the rate of 2012, according to a Securities and Exchange Commission filing by operator Genesis Energy L.P.
SGC is comparable to Mars sour
But a major difference is location. SGC is delivered into Nederland, Texas, some 100 miles from the terminus of the Seaway Twin, while Mars is delivered into Clovelly, Louisiana.
SGC is already beginning to suffer by comparison. It traded as much as $1.90 a barrel above Mars crude in 2012, but cash prices have collapsed more recently as it faces competition from grades crude being pumped into the Houston area.
On the 30-day moving average, SGC has traded at a discount of as much $2.44 a barrel versus Mars, according to Reuters data, the biggest such discount since production began more than five years ago. Last Wednesday the discount was $3.13 a barrel, and traders expect demand for SGC to continue to weaken once the pipeline starts up.
THE SECOND BLOW
Seaway Twin is coming online at a moment of seismic change in the way excess domestic inventory is being distributed.
Until recently, inventory tended to pool up at Cushing, the delivery point for futures and the biggest hub of independent oil storage tanks. But with rising production in the north and new pipelines pumping oil all the way to the coast, the location of the growing domestic glut has shifted.
Cushing stocks fell recently to their lowest levels in six years, while stocks on the Gulf Coast rose to a record high at the start of May, according EIA data.
Adding to the flexibility of oil flows, a 95-mile, 30-inch-diameter lateral pipeline will soon connect the Echo storage and distribution terminal in south Houston to the Beaumont and Port Arthur, Texas, area, expanding the reach of WCS crude beyond Houston's refinery row.
As more heavy, sour crude flows east from Houston, more Mars is likely to be displaced, and eventually imports, particularly Mexican Mayan and Venezuelan, will be pushed out, Fielden said.
“Will they sell their barrels somewhere else? This will impact trade flows.”
Gulf Coast region imports of Mayan crude dropped to 67,233 bpd in May from 81,125 bpd a year earlier, according to data from PIERS available via Eikon.
