Despite a reconfiguration of crude-oil transportation, growing production from unconventional resources still strains
logistics in North America as it reshapes crude pricing and
refinery operations, according to Deutsche Bank Securities
In a Sept. 10 report, researchers Paul Sankey, David T.
Clark, Silvio Micheloto, and Winnie Nip say pressure will
build to allow US exports of crude oil, whether by ending
the statutory prohibition now in place or by allowing “
work-arounds” in current export licensing.
The transportation revamp, which began about mid-
2012 and will be largely complete by mid-2015, involves
more than 80 major pipeline projects with total combined
capacity exceeding 16 million b/d. It responds to the surge
in production of light oil from low-permeability formations
and of blended and upgraded bitumen from the Canadian
oil sands, supplies of which have slashed requirements for
imported crudes at US refineries.
Although other pipeline projects will remain in progress
after mid-2015, the system by then will have become “highly
efficient,” the researchers say, meaning it will provide “the
ability to arbitrage away short-term price aberrations.”
“Those days are over now,” the researchers say, adding
that by the end of next year’s first quarter pipeline capacity
will be adequate at all transport centers important to WTI
crude—Cushing, the Permian basin, Houston, Port Arthur,
Tex., and St. James, La. Key projects are the Keystone XL
southern leg, Seaway twin, Houma-to-Houston (Ho-Ho) re-
versal, and ramp-up to capacity of Permian-Gulf Coast pipe-
For the next few months, the researchers say, the US will
import about 700,000 b/d of light crude, about 300,000 b/d
of it on the Gulf Coast. During the next 12 months, however, North American supply of light crude will increase by
700,000 b/d, “so conceptually the continent will self-supply
in terms of light by mid-2014,” the researchers say.
Prices and production
The price of domestically produced light crude then will
come under increasing pressure, selling at a widening discount to international crudes of similar quality.
As transport reconfiguration finishes south of Cushing
and US production of light crude increases further, refin-
ers will require a discount to justify adjustments to crude
slates and equipment allowing increased processing of light
“If the crude export ban stays in place and is enforced,
and if meaningful supply growth continues, eventually the
surplus will force prices down to the marginal cost of production in the unconventional basins until production rationalizes—or the crude export ban is revised or lifted,”
the Deutsche Bank analysts say. They estimate the marginal
price in parts of the Bakken play at $75-80/bbl.
The Brent-WTI spread will remain important because
product trading is linked to Brent. But relationships between
Louisiana Light Sweet and WTI crudes and between values
at Cushing and Houston will be increasingly influential,
with crude flows dictated by prices at St. James, Cushing,
Deutsche Bank expects overall production increases in
North America to be 1.1 million b/d this year, less than 1
million b/d in 2014, and less than 900,000 b/d in 2015. Canadian growth will increase in the mix each year. Later in
the decade, the researchers predict, production will quit
growing in the Bakken and Eagle Ford plays, but Canadian
growth will continue.
By the end of the decade, the researchers expect North
American production to approach 14. 5 million b/d of crude,
with the US accounting for more than 9 million b/d.
Hunger for heavy
The researchers describe Gulf Coast refiners as “hungry for
more heavy crude” as Mexican and Venezuelan supplies decline and requirements increase for light-heavy blending in
response to the light-supply surge.
Pipeline capacity allowing Canadian heavy material to
reach the Gulf Coast will become “meaningful” next year,
they say—slightly more than 500,000 b/d. Although that capacity will jump to more than 1 million b/d in the next 2
years, refineries in the Midcontinent and Western Canada
will absorb 1.7 million b/d of Canadian supply.
Gulf Coast refineries, with coking capacity of about 1.6
million b/d, run about 2. 3 million b/d of 25° gravity or
heavier crude. They could run heavy crude at amounts 2-2. 5
times their coking capacity, the researchers said, adding
they expect Gulf Coast refiners to increase heavy crude runs
because of increasing access to Canadian supplies and the
need to blend heavy with growing amounts of discounted
light crude produced in the US.
“If Gulf Coast refiners don’t adjust their slate as much as
we think and keep running 2. 3-2. 5 million b/d of heavy, Canadian heavy will shove out Venezuelan and other heavies
(Colombia, Brazil, etc.), leaving the market to Canadian and
US crude logistics straining
despite transport reconfiguration