The U.S. shale boom has driven the cost of Gulf Coast light, sweet oil to its lowest level versus Brent crude in almost a quarter century as the nation’s dependence on foreign supplies wanes.
Light Louisiana Sweet, the benchmark grade for the Gulf Coast known as LLS, has traded on the spot market at an average of 15 cents a barrel more than Brent this year, the smallest premium since at least 1988, data compiled by Bloomberg show. The spread’s highest annual average was $4.02 in 2008.
The drop has cut costs for refiners in Texas and Louisiana accounting for 45 percent of U.S. capacity and replaced competing shipments from Africa. Gulf imports of light, sweet crude have fallen 56 percent since 2010, according to U.S. Energy Department data. A shale-oil influx from the Eagle Ford formation in Texas and Bakken in North Dakota and new ways to bring crude to the Gulf, such as this year’s reversal of the Seaway pipeline, may accelerate the shift.
“The market dynamics are changing,” Edward L. Morse, head of commodities research at Citigroup Global Markets in New York, said in a telephone interview. “When the Gulf Coast was a crude importer, they had to attract crude from elsewhere in the world, which meant LLS had to be at a premium to Brent. But now we’re moving into a totally different situation.”
Light Louisiana Sweet, a grade prized because its low- sulfur content and density make it easier to process into fuels such as gasoline, was 92 cents cheaper than Brent yesterday. It averaged 20 cents less than the benchmark in the third quarter.
Brent oil for October settlement rose 40 cents, or 0.4 percent, to $113.49 a barrel yesterday on the London-based ICE Futures Europe exchange. The contract advanced as much as 0.5 percent to $114.05 in trading today.
U.S. oil output surged to the highest level in 13 years in July, according to weekly Energy Department data. The U.S. met 83 percent of its energy demand from domestic sources in the first five months of this year and is heading for the highest annual level since 1991, department figures compiled by Bloomberg show.
“Unconventional oils and gas are changing everything about our competitiveness in the United States,” Bill Klesse, Valero Energy Corp.’s chief executive officer, said yesterday at the Barclays CEO Energy/Power Conference in New York. “Before you know it, we’re going to have so much light, sweet crude that in the U.S. Gulf Coast we’re not going to be importing light, sweet crude, and we think that happens next year.”
Houston, New Orleans and other ports along the Gulf Coast accepted about 554,000 barrels a day of light, sweet oil from outside the U.S. in June, down from 964,000 barrels a day in June 2011 and about 1.25 million in June 2010, according to the Energy Department’s Energy Information Administration.
The West African nations of Nigeria, Angola, Gabon and Equatorial Guinea accounted for 58 percent of the light, sweet crude imported into Gulf Coast ports in June 2012. North African nations accounted for a further 30 percent.
LLS will become about $5 a barrel cheaper than Brent during the next 12 months, David Pursell, a Houston-based managing director for Tudor, Pickering, Holt & Co., said in a telephone interview. The discount would take into account the extra cost of getting LLS to other customers, such as refiners on the East Coast, Pursell said.
Like oil in the Midcontinent, the relationship between LLS and Brent has been upended by surging shale production. West Texas Intermediate oil at Cushing, Oklahoma, the U.S. benchmark grade traded on the New York Mercantile Exchange, shifted to a discount to Brent almost two years ago after trading at a premium for decades.
Cushing inventories surged to 47.8 million barrels in June, the highest level since Energy Department records for the hub began in 2004. The WTI-Brent spread reached a record $27.88 in October. It was at $18.03 a barrel today.
“Over the last year and a half, with the WTI-Brent spread blowing out, the primary beneficiaries have been the Midcontinent players,” Cory Garcia, a Houston-based oil analyst for Raymond James & Associates, an arm of the financial-services company with almost $40 billion under management, said in a phone interview. “As LLS disconnects next year, the benefits to Gulf Coast refiners will be brought to the forefront.”
Enbridge Inc. (ENB) and Enterprise Products Partners LP (EPD) reversed the flow of crude on the Seaway pipeline on May 19. The link, carrying as much as 150,000 barrels a day from Cushing to Gulf Coast refineries, is scheduled to pump as much as 400,000 barrels a day early next year.
- Report: Shale boom revamping U.S. refining industry (fuelfix.com)
- Gulf of Mexico production ramps up after Isaac (fuelfix.com)
A report published by Baker & McKenzie has said that last year the US government approved exports from a second terminal, and decisions on eight other applications for export approval are expected later this year.
Implications for Japanese LNG buyers and investors
The report stressed that expanded U.S. LNG exports represents an opportunity not only for Japanese LNG buyers to diversify their supply sources with shale gas but also at more competitive pricing linked to Henry Hub prices rather than oil prices. Japanese companies also could establish value chains in the U.S. by investing in projects to build export facilities and by acquiring interests in shale gas fields.
Since 1967 the Kenai LNG Plant in Alaska, which produced all eight of the LNG cargoes shipped from the U.S. to Japan in 2011, had been the only LNG plant with export approval. This changed last year when the Sabine Pass facility in Louisiana obtained export approval. Eight other applications for export approval are now pending.
Export approval process and outlook
Under the Natural Gas Act gas exports require permission from the federal government. Such permission is only granted if the Department of Energy (DOE) determines that the proposed exports are consistent with the public interest. Exports to 17 countries which have free trade agreements (FTAs) with the U.S. are deemed consistent with the public interest and the DOE must approve exports to these countries “without modification or delay”. In contrast, approvals for exports to non-FTA countries, including Japan, are subject to a lengthy public interest finding process which allows for comments, protests, and motions to intervene from interested parties.
The applicable legislation does not require the DOE to take action on applications within a certain timeframe. After Sabine Pass received approval for exports to non-FTA countries in May last year, the DOE suspended consideration of all applications pending the results of a study on the impact of exports on the domestic energy market. This followed complaints from some U.S. lawmakers who were concerned that exports might increase domestic prices. The domestic market impact study was initially scheduled to be completed by the first quarter of this year, but it is still pending and is now expected to be completed later this summer. Accordingly, none of the pending applications are likely to be approved until the fourth quarter of this year at the earliest.
There are, however, some reasons to believe there is political support for expanding LNG exports to non-FTA countries such as Japan. For example, on July 2, 2012, a bipartisan group of 21 members of Congress from states with shale gas deposits sent a letter to Energy Secretary Steven Chu urging the DOE to expedite the pending LNG export applications. In February, Secretary Chu said he supports LNG exports, and Prime Minister Yoshihiko Noda also said he discussed expanding LNG exports when he met with President Barack Obama on April 30, 2012.
Actions to consider
• Conduct preliminary due diligence on LNG projects with pending non-FTA export approval applications, as these projects are likely to be now seeking LNG buyers and equity investors.
• Monitor the DOE’s non-FTA export approval process.
• Investigate the compatibility of LNG produced from U.S. shale gas with regasification facilities and pipeline networks in Japan
Given the currently wide differential between the Henry Hub spot price used for trading on the New York Mercantile Exchange (NYMEX) and JCC pricing, expanded LNG exports produced from U.S. shale gas fields is a potential game changer for the gas market in Northeast Asia, and Japan in particular. From the Japanese buyer’s perspective, it is clear that approvals for further export terminals is an important development to monitor in order to position themselves as potential buyers and equity investors. For more information, please contact Colin Cook or Hiromitsu Kato.
Source: Baker & McKenzie via: Source
- Japan LNG Demand on the Rise, Looks to Secure US Export Contracts (gcaptain.com)
- It’s a Ridiculously Good Year to Own an LNG Ship [REPORT] (gcaptain.com)
LAKE JACKSON – The shale boom’s bounty of cheap natural gas is fueling an industrial renaissance on the Texas coast, one that was in full focus Thursday as Dow Chemical announced the latest piece of a $4 billion expansion of its chemical operations in Southeast Texas.
The $1.7 billion plant Dow announced Thursday, one of four it plans to build or expand at its Freeport complex, is aimed at taking advantage of cheap natural gas produced from shale, which the company expects to be available for the long term.
The four plants would create more than 4,800 jobs at their construction peaks and would support up to 600 permanent jobs, with average salaries of $75,000, when completed.
The plants would not have been viable in the United States before the boom in production of domestic fossil fuels from shale, which has flooded markets with of cheap natural gas, he said.
“If you had told me 10 years ago I’d be standing up on this podium making this announcement, I would not have believed you,” Liveris said, flanked by Gov. Rick Perry and Lt. Gov. David Dewhurst during an announcement Thursday at Brazosport College.
“Even though Texas had its great mechanisms to attract business, the cost of energy, the cost of feedstocks, which would have been the price of oil and the price of gas, was pricing the United States out of the market,” he said. But the shale “miracle” changed that.
The main attraction Thursday was Dow’s plan for an ethylene cracker that will convert natural gas and its liquid byproducts, such as propane, butane and ethane, into building blocks of plastics used in water bottles, vinyl and other items.
Others are eager
Other chemical companies also are betting on bountiful supplies of natural gas.
Chevron Phillips said this month it will build a $1 billion chemical plant at its Baytown facility, largely because of cheap natural gas liquids.
Shell is evaluating plans to build a major plant in Pennsylvania, which also would leverage cheap liquids to produce chemicals used in a broad array of products.
Liveris said natural gas would have to rise to above $10, with oil prices remaining above $100, to cause concerns about a return on its investment.
In trading Thursday on the New York Mercantile Exchange, natural gas fell 4.4 cents to $1.907 per million British thermal units.
Dow believes a substantial jump in gas prices is unlikely, unless the government allows a surge in liquefied natural gas exports or offers dramatic subsidies to encourage greater use of natural gas-fueled cars.
“There’d be a lot more than just us screaming from every corner of Washington and state legislatures that get involved with that,” Liveris said.
Keeping it at home
Liveris argued that gas should not be exported on its own but used to produce products for export at higher values.
“Why don’t we take this gas and create 15 to 20 times value added and not export it as liquid but export is as solid?” he asked.
Perry said the Texas Enterprise Fund will invest $1 million in the new Dow facility. The total is less than a tenth of 1 percent of the plant’s overall costs, but Perry said the investment played into the company’s decision to locate the plant in Texas.
“They can go everywhere in the world,” he said. “They’re not coming here just because we have great weather – in April and May. They’re not coming here just because we’ve got great music and great barbecue. They’re coming here just because they know this is the type of environment that they want to be associated with. This is the place they want to do business.”
Liveris called Texas’ partnerships with businesses an example for the nation to follow.
“I know when I get red carpet, and I know when I get red tape,” Liveris said. “And I get red carpet in the state of Texas.”
While the Texas Enterprise Fund was a small factor, the plant’s location will allow for it to be integrated easily with Dow’s existing facilities in the area, said Jim Fitterling, Dow’s president of feedstocks, energy and corporate development.
Dow, based in Midland, Mich., expanded its operations to the Texas coast 70 years ago and has maintained a strong presence ever since. The new plants will make Freeport Dow’s largest petrochemical complex and one of the world’s biggest, Liveris said.
- Gas Exports Ignite a Feud (mb50.wordpress.com)
- Why shale energy will be a game-changer for America (business.financialpost.com)