Daily Archives: November 16, 2011

Ironically Texas May Be Forced To Export Unrefined Crude By 2012

The US oil industry is in a bit of a quandary. The Houston & Louisiana refining area is the largest in the world. It has just had tens of billions of dollars thrown at it, to prepare it to run heavy sour sources. These heavy sour grades are typically cheaper, and contain lots of secondary products during the refining process.

In simple terms, we have spent the last twenty years preparing to make more out of lower quality oil. It was a great idea, when the handwriting on the wall said these would be the only real sources of future growth in hydrocarbon volumes.

This is now a problem for some companies, as their own refinery’s need the heavy sour crude’s to fuel these their product runs. What are they to do with a flood of light to super light sweet crude’s?

If they ran this stuff, they would  have to turn off a significant number of units at their refinery’s that are designed to capture and crack the heavy sludge. This leave the US refining patch in a bit of a jam.

The new Eagle Ford shale oil is coming online in large volumes. Rumors are that Eagle Ford production will crack 500,000 barrels by the end of 2012, if they can get around localized shipping constraints.

Right now it is the gathering of the stuff in quantities that are easy to ship/export that is the issue.The crude is so light in some places, they need specialized trucks to collect it and bring it to a gathering location. There isn’t the capacity to pick up the crude and bring it to market available right now.

We are talking about 100,000 barrels of oil production behind pipe right now, and growing daily as people rush to install new smaller capacity pipelines around Texas to help haul it away.

The number of companies that believe they can growth their domestic production by 100,000 barrels of oil in the next couple of years is growing.

The irony is that the new supply is super light & sweet. A mix never expected in the US again.

Platts had an article on this exact topic in June of 2011.

The US could resume exporting some of its domestic crude oil production in 2012 when the output from Eagle Ford Shale in Texas ramps up.

Eagle Ford shale crude’s gravity ranges from 42 API to 60 API with very low sulfur content, which in the US Gulf Coast refining terminology is considered a super light crude.

But that’s the problem for US refiners: they aren’t built to process that type of crude. So the highest value for it may be outside the country.

The US exports may be to the US East Coast first. The refinery’s based on the east coast tend to have a higher sweeter demand over their Southern units.

In fact, the blow out in Brent prices has severely affected their profits due to sourcing costs increasing significantly this spring with the Libya revolution. There have been at least 3 refinery’s put up for sale or being put into mothballs until a cheaper source of crude is available.

“U.S. east coast refining has been under severe market pressure for several years. Product imports, weakness in motor fuel demand and costly regulatory requirements are key factors in creating this very difficult environment,” ConocoPhillips said when it put Trainer on the auction block.

If the three refineries on the block shut down, what does this mean for oil markets?

In the case of the US, if Texas starts to export light sweet crude by large barges to the east coast. You could see a Renaissance in US exports of refined products as these units produce above domestic demand needs.

The irony is that in the US we have removed the demand for the lighter sweet crude’s, so much so we will soon be exporting it from our primary refining center due to excess capacity in supplies. NOT DEMAND.

The energy crisis of 2005 is not the supply crisis everyone was looking for. I wonder how long it will take society to catch up to the new reality. The US is going to become an energy exporter, even if its Texas shipping crude to those Yankees up north.

Before you fall out of your chair laughing, look at this chart, conceptualize it, and then leave me a comment in the section below. I look forward to your thoughts on this chart.

chart

It’s a chart of barrels of oil produced per year from a specific zone in Texas. It will double every year for the next few. Then think about other new zones like it coming online in the next few years. Its a small amount today, but a not so small amount by tomorrow.

U.S. China Policy: A Snake with Three Heads

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By PATRICK SMITH, The Fiscal Times

It’s dismaying to consider that the world’s largest economy may not know what it’s doing when faced with the planet’s No. 2 economy (and one of the fastest growing). But three of Washington’s most recent moves toward mainland China—the security pact with Australia, a compromise defense deal with Taiwan, and the threat of retaliatory tariffs on Chinese imports—suggest that this may be the case. Are we trying to smooth relations with Beijing and exit a long era of mutual suspicion? Or is China our latest scapegoat, the Japan of the early 21st century?

With President Obama just agreeing to an expanded military presence in Australia, much to the dismay of Beijing, a fair question is: What exactly is U.S. policy toward China? A better one might be: Does Washington actually have a China policy?

The Obama administration’s decision to deny Taiwan a big new arms agreement suggested that the U.S. is finally learning that Beijing and Taipei can manage relations across the Taiwan Strait by themselves. It looked for a minute as if Washington was beginning to understand that U.S.–China relations have entered a productive period of close interdependence, mutual regard, and a new balance in cross-Pacific ties.

But almost as soon as the administration made this sensible judgment, the Senate decided that it was time to have yet another antagonistic run at the Chinese for manipulating their currency to enhance exports. China isn’t even named in the bill that would impose retaliatory tariffs on countries that keep their currencies artificially low, but the bill is all about the undervalued yuan, and pre-election politics on our side of the ocean.

These two decisions, one following the other by less than 10 days, had nothing to do with one another except that they both will affect our ties with Beijing. And that is precisely the point. You can’t blame the Chinese for concluding that the U.S. simply does not have a coordinated policy toward the mainland. The State Department and the Pentagon do one thing and the Senate another, and who cares if they are in direct conflict as far as advancing healthy cross-Pacific relations with our largest trading partner (and creditor)?

And in Australia yesterday, the AP said, “the president sidestepped questions about whether the security agreement was aimed at containing China. But he said the U.S. would keep sending a clear message that China needs to accept the responsibilities that come with being a world power. …And he insisted that the U.S is not fearful of China’s rise.”

That must have further wrenched many necks in Beijing.

In the case of the Taiwan arms deal, Taipei wanted to buy a fleet of 66 top-of-the-line fighter jets from Lockheed Martin. The administration instead decided to upgrade the earlier-generation Lockheeds (146 of them) that Taiwan already has in its arsenal. That deal alone is worth nearly $6 billion.

This was astute for several reasons. It signaled to Beijing a respect for its policy toward Taiwan, which it considers a breakaway province, while observing the Taiwan Relations Act, a Cold War relic that obliges the U.S. to defend the island against aggression from the mainland. Equally, the decision will do no harm to the growing economic ties that Beijing and Taipei are using to warm relations between them.

Chinese officials grumbled at the U.S. announcement, but it was ritualistic—and intended to be read as such. “China firmly opposes U.S. arms sales to Taiwan,” was all the foreign ministry in Beijing had to say. Plainly, the Obama administration hit the bull’s eye with the upgrade-but-no-sale policy, and it was a tricky bit of navigation.

Then along comes the Senate and its bill to impose currency-related tariffs clearly aimed at China. This idea has managed to inflame the Chinese: The foreign ministry is suddenly talking about the potential for a “trade war.” Before the Senate vote on October 11, Fed Chairman Ben Bernanke piled on in testimony before a congressional committee. “Our concern is that the Chinese currency policy might be blocking a more normal recovery,” he said. “It is to some extent hurting the recovery.”

Wait a minute. To what extent would that be? What it looks like is that in the run-up to next year’s presidential election, the administration and its allies on Capitol Hill—it’s the Democrat-controlled Senate that is pushing the tariff idea—are getting ready to spread the blame to China for the inevitable criticism the Obama campaign will take for the weak U.S. economy.

There are a couple of things wrong with this tactic. For one thing, the Chinese yuan has appreciated slowly but without serious interruption since July 2010. It now costs 6.34 yuan to buy a dollar; a year and a half ago it cost nearly 6.8 yuan.

All right, a 6 percent to 7 percent appreciation is nothing to write to mother about; more is needed. But clearly, Beijing made a policy decision in mid–2010, and this is reason No. 1 for not threatening retaliatory measures now. It is not the time to provoke Chinese ire: The markets expect continuing improvement.

Reason No. 2 is that we’ve been down this road before. Remember the Plaza Accord in 1985, after which the Japanese yen doubled in value against the greenback? Then what happened? Japan went on a politically touchy buying spree abroad, and the U.S. trade deficit went from $46 billion in 1985 to $56 billion two years later. (It’s now steady at about $60 billion a year. Fat lot of good the Plaza Accord did.)

Reason No. 3 is that a more expensive yuan will mean more expensive Chinese goods on American shelves. And we do not want an inflation fight on our hands right now, considering the overall weakness of the economy and, in particular, the anemic growth in U.S. jobs.

In effect, the bill the Senate passed after hasty debate would export one problem, a political tangle over the economy next year, and import another, higher prices on Chinese goods coming into the U.S. market.

Washington needs to get its act together, develop a coherent approach to China, and stop looking for someone else to blame for our economic woes. China will not be as graceful in such matters as Japan was a quarter-century ago. Beijing has already made this clear: It dropped the value of the yuan immediately after the Senate vote.

Source

Tensions rise on South China Sea dispute

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Tom Allard
November 17, 2011

TENSIONS over the oil-rich and strategically important South China Sea escalated yesterday, as Chinese state media accused the US and the Philippines of planning a ”grab” for its resources and a senior foreign ministry official said it did not want the issue discussed at this week’s East Asia Summit in Bali.

Meanwhile, US Secretary of State Hillary Clinton said yesterday in Manila that the US ”will certainly expect and participate in very open and frank discussions” on the topic at the summit, which will be attended by US President Barack Obama, Chinese President Hu Jintao and Prime Minister Julia Gillard.

The looming confrontation over the South China Sea threatens to overshadow the East Asia Summit, a grouping of nations based on the south-east Asian countries of ASEAN that has emerged as the prime forum for security and political discussions in the Asia-Pacific region.

The South China Sea is a potential flashpoint between the US and China as the two powers seek to assert their interests in Asia, the fastest-growing region in the world.

The US has leapt on nervousness among smaller Asian nations about China’s growing military might and bellicose diplomacy to reassert its long-standing role as an anchor of security in Asia, even as its economic importance wanes. Before Mrs Clinton’s visit to Manila and the East Asia Summit, which the US will attend for the first time, China’s state-run Xinhua news agency said: ”Now that Obama is scheduled to appear at the ASEAN Summit, the Philippines will embrace the ‘golden chance’ to get back at China, again churning up the South China Sea.”

The Global Times, another Chinese government mouthpiece, said the Philippines, aided and abetted by the US, was intent on ”grabbing resources from Chinese water”. ”We hope the South China Sea will not be discussed at the East Asia Summit,” Chinese Vice-Foreign Minister Liu Zhenmin said.

Mrs Clinton yesterday signed a declaration with her Philippines counterpart, Albert del Rosario, aboard the guided missile destroyer USS Fitzgerald in Manila Bay, to boost defence co-operation between the two countries and calling for multilateral talks on the South China Sea.

The Philippines is one of six countries claiming part or all of an archipelago in the South China Sea known as the Spratly Islands, which are believed to lie above significant oil and gas reserves. The area is also of high strategic value as a vital sea lane for much of the world’s trade.

This year, Chinese and Philippines naval ships have had skirmishes with fishermen and other vessels each country believed had been encroaching on its territory.

While many of the claimants – which also include Vietnam, Malaysia, Taiwan and Brunei – want multilateral talks to solve the dispute, China insists on one-on-one negotiations.

Burma is set to chair the 2014 ASEAN and East Asian summits after members said its political reforms meant it was now a suitable candidate for the role.

The US, Australia and other participants still have sanctions in place against Burma but have cautiously welcomed the release of political prisoners and other reform in a country that was run by a military junta for decades until elections this year.

ASEAN foreign ministers ”all recognize the important and significant developments taking place in [Burma]”, Indonesian Foreign Minister Marty Natalegawa said.

Source

Seaway Pipeline gets turned around; oil markets react quickly

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By John Kingston

Here are some of the questions we’ll be pursuing regarding the reversal of the Seaway Pipeline, announced earlier this morning as part of the sale by ConocoPhillips of its 50% Seaway stake to Enbridge Energy Partners.

–The Brent/WTI spread has been less than $10/b on the news, a movement of as much as $3/b in one day. It’s been as wide as $27 in recent months. We wrote about a prominent analyst predicting it would go to $40.

But here’s another number: $7. That’s the figure that has been thrown about loosely about how much it costs to move a barrel of crude out of the Bakken by rail to the Gulf of Mexico or to other points. There is obviously a great deal of variability depending on where the oil is going. But the key point is if the Brent/WTI spread continues to narrow on both the news and the early 2012 start of 150,000 b/d of crude moving down Seaway to the Gulf of Mexico, does the spread narrow so much that the $7 train ticket for a barrel of crude become too steep? And if that happens, does the Seaway reversal, at a certain point hinder rail enough that it makes that option for moving Bakken crude less competitive?

–There are numerous non-US crude grades that can be delivered against the NYMEX crude contract. You can find them here; go to page 4.

When the NYMEX light sweet (i.e., WTI) price was consistently more than the Brent price, the deliverability of those grades always acted as a brake against the price of WTI running away from the rest of the market, due to its disconnected state from the rest of the world. If Merc crude got too high, the deliverability would allow these grades to be moved up Seaway and delivered against the Merc contract, keeping the Merc price in check. This became moot when the price of WTI collapsed relative to Brent. But the other deliverable crudes remained on the books.

Without Seaway running from the Gulf of Mexico to the NYMEX delivery point of Cushing, Oklahoma, how could those grades get there? So do they remain as deliverable crudes?

–The quick hit list of winners and losers might look something like this:

Winners: Gulf Coast refiners, with pipeline access to all the oil sands and Bakken crude flowing into Cushing; North Dakota producers (if they can get the oil from the Bakken down to Cushing in the first place); Enterprise Partners, who won’t need to build the Wrangler Pipeline to capitalize on the need for a Cushing-Gulf Coast crude line, since it will own 50% of a now reversed Seaway Pipeline

Losers: exporters of crude to the US, whose market into the Gulf Coast may close a bit as more oil drains from tanks at Cushing and down to the Gulf Coast; railroads, for the reason listed above; possibly the Keystone XL Pipeline, if its MarketLink section from Cushing to the Gulf gets pushed aside by Seaway (as if it didn’t have enough other things to worry about, and also the fact that TransCanada officials said today it could compete); Midcontinent refiners who almost certainly will see their tremendous refining margins shrink.

Source – The Barrel

Conoco’s Brent Control

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Jenga! ConocoPhillips just knocked a big hole in the delicate logistical edifice on which the biggest anomaly in the oil world has been balancing.

In oil markets, 2011 has been the year of the great Brent spread. The North Sea crude oil benchmark has been trading at an unusually high premium to U.S. West Texas Intermediate oil for much of the year after many years of rough parity or trading at a slight discount.

On one side, the Libyan conflict pulled up demand for Brent. On the other — as discussed in this “Heard on the Street” column from February — logistical constraints have kept an increasing amount of oil bottled up in the Midwest. As Cushing, OK is where the WTI contract is settled physically, this glut has kept WTI prices depressed, widening the spread. Having started the year trading at a premium of $3.37 a barrel to WTI, Brent’s lead hit a peak of almost $27 on September 6th.

Now one of those bottlenecks on WTI is likely to be eased. Conoco is selling its 50% stake in the Seaway pipeline to Canada’s Enbridge Inc. Conoco kept the pipeline running northwards, i.e. bringing oil from the Gulf coast to Cushing. This kept oil bottled up in the Midwest, meaning Conoco’s refineries there had access to cheaper raw material, allowing them to generate big profits. Now that Conoco is splitting itself, it has no need for Seaway. And Enbridge, as a pipeline operator, has no incentive to keep the pipeline flowing north. By the second quarter of 2012, it expects Seaway to be transporting 150,000 barrels per day from Cushing to the Gulf coast, alleviating the WTI glut.

As of now, Brent’s premium to WTI has collapsed another $2.37 this morning, and is now down under $11 a barrel. As more pipelines get built over the next several years — including, perhaps, a rerouted Keystone XL — the great 2011 spread will be but a fond memory in oil refiners’ minds.

–  Liam Denning

Source

Enterprise, Enbridge look to Port Arthur access

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NEW YORK, Nov 16 (Reuters) – Enterprise Partners and

Enbridge plan as part of the reversal of the Seaway pipeline

project to build an 85-mile (135-km) pipeline from its ECHO

terminal in Houston to refineries in Port Arthur, a spokesman

for Enterprise said on Wednesday.

The pipeline’s open season to garner shipper commitment

will happen early in 2012.

‘It will allow heavy Canadian crude access to Port Arthur

refineries,’ said Rick Rainey, spokesman for Enterprise.

(Reporting by Janet McGurty)

Oil in New York Surges Above $100 on Reversal of Seaway Pipeline

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By Mark Shenk

Nov. 16 (Bloomberg) — Oil in New York climbed above $100 a barrel to a five-month high as Enbridge Inc. said it would reverse the direction of the Seaway pipeline, opening an outlet for crude from the central U.S. and Canada.

Futures rose much as 2.7 percent after Enbridge agreed to acquire ConocoPhillips’s share of the pipeline that runs between Cushing, Oklahoma, and the Gulf Coast and announced the reversal. The change may alleviate a bottleneck at the Cushing storage hub that had lowered the price of West Texas Intermediate, the grade traded in New York, versus other oils.

“In the short term, this will definitely clear some of the crude out of Oklahoma,” said Francisco Blanch, head of commodities research at Bank of America Corp. in New York. “This may not be enough to eliminate the glut in the Midwest because output is growing by hundreds of thousands of barrels a year. We still need additional transportation capacity.”

Crude oil for December delivery rose $2.08, or 2.1 percent, to $101.45 a barrel on the New York Mercantile Exchange. Futures reached $102.06, the highest level since June 10. The contract traded at $99.70 before the Seaway announcement.

Brent oil for January settlement dropped $1.39, or 1.2 percent, to $110.79 a barrel on the ICE Futures Europe exchange in London. The European contract’s premium to West Texas crude narrowed to as little as $8.32 a barrel, the smallest spread since March 9. The spread surged to a record high of $27.88 on Oct. 14.

Initial Pipeline Capacity

The pipeline will operate with an initial capacity of 150,000 barrels a day by the second quarter of 2012, according to a statement from Enbridge. Enterprise Products Partners LP also owns a share of the link.

The pipeline will enable more oil from Canada and North Dakota to reach the Gulf Coast, home to about half of U.S. refining capacity.

The reversal “will definitely reduce the amount of rail and barge that is needed,” said Hussein Allidina, the head of commodity research at Morgan Stanley in New York. “You are still going to evacuate some crude via some of these higher costs transportation means” as Canadian and U.S. output rises.

An Energy Department report today may show U.S. crude oil stockpiles fell 1.2 million barrels last week, according to the median of 13 analyst responses in a Bloomberg News survey. Supplies increased 1.3 million barrels last week, the American Petroleum Institute said yesterday.

The industry-funded API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department for its weekly survey.

–With assistance from Aaron Clark in New York. Editors: Richard Stubbe, Charlotte Porter

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

ConocoPhillips Sells $2B in Pipeline Assets

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by  ConocoPhillips

ConocoPhillips announced that as part of its ongoing strategy to create shareholder value it has entered into agreements to sell its interests in two U.S. pipeline companies for a total of $2 billion.

ConocoPhillips has entered into definitive agreements with a subsidiary of Caisse de dépôt et placement du Québec (CDPQ) to sell its 16.55 percent interest in Colonial Pipeline Company and Colonial Ventures LLC (Colonial). The transaction is anticipated to close in the first quarter of 2012 following the completion of contractual Rights of First Refusal review by the existing shareholders in Colonial.

In addition, ConocoPhillips has entered into definitive agreements with Enbridge Holdings (Seaway) L.L.C., a subsidiary of Enbridge (U.S.) Inc., to sell its ownership interest in the Seaway Crude Pipeline Company (SCPC). The transaction is anticipated to close in December, subject to satisfaction of customary conditions precedent and completion of certain arrangements regarding other logistics services currently provided by SCPC to ConocoPhillips.

“These two sales of non-core pipeline assets are important components of our $15-20 billion divestiture program for the years 2010-2012. We are pleased that CDPQ and Enbridge have recognized the value of these quality assets,” said Al Hirshberg, senior vice president, Planning and Strategy, ConocoPhillips. “Through September 2011, the 2010-2012 divestiture program has yielded proceeds from asset dispositions of $8 billion. Once closed, these two transactions, along with other sales already closed in the fourth quarter, would increase that total to approximately $10.5 billion, and strongly position us to accomplish our target by the end of 2012.”

The sale of the Colonial and Seaway interests is just one part of ConocoPhillips’ plan to create value for shareholders through a continued focus on disciplined capital investment, a strengthened financial position, improved returns on capital, and growth in shareholder distributions.

Source – RIGZONE

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