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)
Obama administration officials ripped into GOP proposals to tie Strategic Petroleum Reserve releases to increases in federal oil and gas land leases and to require new analysis of the economic impacts of several gasoline-related environmental regulations.
A new GOP bill would require a new interagency panel to analyse how certain future Environmental Protection Agency rules might impact gasoline prices and jobs, but an EPA official said the bill wouldn’t reduce prices at the pump and could threaten Clean Air Act health protections.
The Gasoline Regulations Act targets a number of looming EPA regulations, including one for cutting sulfur in fuel by two-thirds, U.S. ozone standards and refinery emissions standards.
Gina McCarthy, an EPA assistant administrator, said in written testimony that the bill appears to use high gas prices as the reason to rollback public health protections, but those protections have little to do with gasoline prices. The bill would also duplicate analysis that is already done by officials.
“This legislation also delays — indefinitely — rules that EPA has not even proposed,” McCarthy said. “In short, this legislation does not address the reasons for the recent increase in the price of gasoline, while rolling back core aspects of the Clean Air Act — which was passed on a bipartisan basis and signed by a Republican president.”
Gasoline prices have steadily become a growing political point as prices rise near the $4 mark for the first time since 2008. The national average hit $3.91 Wednesday, a rise of 2 cents, according to the AAA gas gauge. Houston drivers are paying $3.87, or 9 cents below the record-high price of $3.96 in July 2008.
As prices have risen, the Obama administration has touted an “all-of-the-above” energy plan that officials say is the best long-term solution to the rising energy costs. Republicans, however, have argued the administration should remove unnecessary regulations and spur domestic drilling.
Republicans have also recently proposed that a 1 percent increase in federal lands leased for oil and gas production be required for every percentage point drawdown in oil from the strategic reserve, a 700-million-barrel stockpile on the Gulf Coast for emergency supply disruptions.
That proposal also came under fire by Obama administration officials.
Deputy Assistant Energy Secretary Chris Smith said in written testimony that the Strategic Energy Production Act would make it more difficult for to respond promptly to supply interruptions in crude oil. He argued that the bill would also make release from the strategic reserve more dependent on actions of potential lessees.
“It would also limit DOE’s ability to manage the SPR on a day to day basis, in which releases occasionally are necessary for the routine maintenance and operation of the reserve,” Smith added.
Republicans are proposing the legislation in seeking to position themselves against Democrats and the White House on oil and gas policy, which has surged to the forefront of political debate in the wake of higher gasoline prices. GOP lawmakers insisted Wednesday their legislation would increase oil supplies and decrease refining costs, helping put downward pressure on gasoline prices.
Democrats have called for cracking down on what they view as excessive speculation in oil markets and urged the White House to consider releasing oil from the strategic reserve.
But analysts have repeatedly said policymakers have few, if any, short-term tools to address gasoline prices, which are tied to oil prices set on global markets.
James Burkhard, managing director at IHS CERA, a research firm, said in written testimony said the current run-up in oil prices, the biggest determinant of what consumers pay at the pump, stems from geopolitics, specifically from uncertainty linked to the Iranian nuclear issue.
Analysts have said increased U.S. drilling would take years to kick in and would have, at best, a fractional impact on oil prices. They also have said the strategic reserve is intended for use only during supply emergencies, not as a price-smoothing tool as some Democrats have advocated.
Obama has ripped into GOP proposals to expand drilling into new waters and lands as an election-year “bumper sticker” that wouldn’t reduce gasoline prices. He has touted an “all-of-the-above” strategy of more oil, gas, renewable energy and fuel-efficiency boosts to cut oil use as a long-term strategy for U.S. energy independence.
- US Gasoline Prices Top $3.90 (247wallst.com)
Speaking at a town hall at Houston Community College, Chu said a modest increase in the price of natural gas wouldn’t significantly raise its cost to U.S. consumers who use it to heat their homes and manufacturers who need it to make products.
Natural gas futures closed at $2.55, up 17 cents, in trading Thursday on the New York Mercantile Exchange. It brings much higher prices in other countries.
“Exporting natural gas means wealth comes into the United States,” Chu said.
The Energy Department’s Office of Fossil Energy is reviewing several applications to export liquefied natural gas. The exports would relieve the glut of natural gas on the domestic market and raise revenue, but also potentially increase prices for domestic consumers.
Several U.S. energy companies have announced plans to close their natural gas wells and curb spending in natural gas fields, as its price has fallen from more than $13.50 in 2008.
In his State of the Union speech last week, President Barack Obama called for an “all-of-the-above” approach to domestic energy production, including investment in oil, natural gas and renewable energy sources.
Chu said it’s important that the United States be at the forefront of innovations and technologies in renewable energy.
“We have a choice. When all these things become cost-competitive, do you want to buy or do you want to sell?” he asked. “If we are buying, that is wealth out of the country. If we are selling, that’s wealth into the country.”
Before the hour-long session with students at the college, Chu met with oil and gas executives and explored the Texas Medical Center’s energy efficiency upgrade.
Chu said the administration is open to exploring alternate routes for the pipeline that would carry oil from Canadian tar sands to Gulf Coast refineries.
It’s become a touchstone issue for supporters who say it will create jobs and reduce U.S. dependence on oil from hostile nations, and opponents who argue it could threaten water supplies and promote use of an especially dirty form of oil.
Chu said he supports construction of pipelines nationwide, particularly to relieve the glut of oil at the hub in Cushing, Okla., a major price point for domestic oil.
“There is such a shortage of pipelines between Cushing and Houston,” Chu said. “There will be major construction of pipelines in the next decade or so. All the job creation from Cushing to Houston is being done now.”
Chu touted government investment in wind, solar and other renewable energy sources, as well. He said he expects the cost of solar power to fall by 50 percent within six to eight years.
Chu also dismissed Iran’s threats to close the Strait of Hormuz, a key oil shipment channel, in retaliation for international sanctions aimed at the nation’s nuclear program.
“I don’t think they can really shut down the Strait of Hormuz,” Chu said. “We certainly have capabilities to reopen it.”
- Canada: NEB Approves BC LNG Export Licence (mb50.wordpress.com)
- An emerging player (mb50.wordpress.com)
- Gas Natural Fenosa Deals with Cheniere Energy to Buy US Shale Gas Sourced LNG (mb50.wordpress.com)
- DOE to halt issuing LNG export licenses (mb50.wordpress.com)
- Gas Exports Ignite a Feud (mb50.wordpress.com)
- President Obama’s Domestic Energy State Of Delusion (mb50.wordpress.com)
- Macquarie Vies To Sell U.S. LNG To India (mb50.wordpress.com)
- CLNG: EIA Gas Export Study Reveals Only Part of Economic Picture (USA) (mb50.wordpress.com)
- Chesapeake CEO Opposes US LNG Exports (mb50.wordpress.com)
Cheniere Energy Partners, L.P. announced today that its subsidiary, Sabine Pass Liquefaction, LLC , has entered into an amended and restated LNG sale and purchase agreement with BG Gulf Coast LNG, LLC, a subsidiary of BG Group plc, under which BG has agreed to purchase an additional 2.0 million tonnes per annum (mtpa) of LNG, bringing BG’s total annual contract quantity to 5.5 mtpa of LNG.
BG will purchase 3.5 mtpa of LNG with the commencement of train one operations and will purchase a portion of the additional 2.0 mtpa of LNG as each of trains two, three and four commence operations.
Under the SPA, the purchase terms essentially remain the same, whereby BG will pay Sabine Liquefaction a fixed sales charge for the contracted quantity and will pay a contract sales price for LNG purchases based on the applicable Henry Hub index traded on the New York Mercantile Exchange, with the exception that the fixed sales charge will increase ratably in order to account for the increased fixed sales charge on the additional volumes.
“In assessing the optimal contracting strategy for the Sabine Liquefaction Project, we have decided to sell part of the additional volumes on a long-term basis to BG, our first foundation customer,” said Charif Souki, Chairman and CEO. “There’s a trade-off in whether we sell the additional volumes on a long-term basis or in the open market. Contracting a portion of the additional volumes adds further certainty to the long-term cash flows of the project and preserves the opportunity for additional upside.”
- USA: Cheniere, BG Ink LNG Sale and Purchase Deal
- USA: Cheniere Inks Sabine Pass LNG Supply Deal with GAIL India
- USA: Cheniere, Gas Natural Fenosa Ink LNG Deal
- USA: Cheniere Enters into Contract with Bechtel
- USA: Cheniere Logs Net Loss in Q3
- USA: Cheniere, BG Ink LNG Sale and Purchase Deal (mb50.wordpress.com)
- USA: Cheniere Enters into Contract with Bechtel (mb50.wordpress.com)
- USA: Societe Generale Says Cheniere Can Make Sabine Pass Export Decision After Fenosa Deal (mb50.wordpress.com)
- GAIL to buy 3.5 million tonnes of LNG from U.S. firm (mb50.wordpress.com)
- Gas Natural Fenosa Deals with Cheniere Energy to Buy US Shale Gas Sourced LNG (mb50.wordpress.com)
- USA: Total Close to Sign Sabine Pass LNG Deal (mb50.wordpress.com)
- USA: Sempra Files with DOE to Export LNG from Cameron Terminal (mb50.wordpress.com)
- Soc Gen Says China May Look for US LNG Deals in Future (mb50.wordpress.com)
Oil surged above $100 a barrel on speculation supplies will be disrupted after a report that Iran will hold drills to close the Strait of Hormuz and that the Federal Reserve may announce additional stimulus measures.
Crude advanced as much as 3.6 percent after the state-run Fars news agency reported the military maneuvers will be “soon,” citing Parvis Sorouri, a member of the parliament’s national security and foreign policy committee. The Strait of Hormuz is a bottleneck for oil exports from the Persian Gulf. The Fed is scheduled to release a statement on monitory policy later today.
“There have been a number of rumors floating around the market today,” said Tom Bentz, a director with BNP Paribas Prime Brokerage Inc. in New York. “I saw the Iran story yesterday but those headlines seem to have got traction this morning. There are also rumors for further action by the Fed, but where they come from I don’t know. In this electronic world things can jump quickly and trigger stops.”
Crude for January delivery gained $1.91, or 2 percent, to $99.68 a barrel at 11:07 a.m. on the New York Mercantile Exchange. Earlier, futures touched $101.25 a barrel. Prices have risen 9.1 percent this year.
Brent oil for January settlement increased $2.07, or 1.9 percent, to $109.33 a barrel on the London-based ICE Futures Europe exchange.
“There are no headlines to explain this move,” said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania. “One has to look at the usual suspects. It was probably a fat-fingered mistake or a margin call.”
Crude pared gains after an Iranian Foreign Ministry spokesman said the Strait of Hormuz isn’t closed. The comments on the strait were made by people who don’t have an official title, said Ramin Mehmanparast, the spokesman.
Sorouri, in comments that first appeared yesterday on the website of the state-run Iranian Students News Agency, said “if the world wants to make the region insecure, we will make the world insecure.”
About 15.5 million barrels of oil a day, about a sixth of global consumption, flows through the Strait of Hormuz between Iran and Oman, according to the U.S. Department of Energy.
“This is the kind of story that sends a shock wave through the market,” said Richard Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago.
The market also rose on speculation that the Fed will announce a third round of bond purchases in a tactic that has been dubbed quantitative easing. The Fed bought a total of $2.3 trillion in bonds in two rounds of quantitative easing from December 2008 until June 2011.
Fed Chairman Ben S. Bernanke and his policy-making colleagues plan to meet today to discuss the outlook for an economy that has strengthened since their November meeting, lowering the jobless rate to 8.6 percent from 9.1 percent.
- Oil surges on speculation of supply disruption (business.financialpost.com)
- Oil Surge Begins (mb50.wordpress.com)
- Iran Military Practicing Straits Of Hormuz Closure (zerohedge.com)
- Crude shoots up along with stock rally (seattlepi.com)
- Report: Iran To Practice Closing Strait Of Hormuz (jhaines6.wordpress.com)
Enbridge Inc. and Enterprise Products Partners LP haven’t just reversed the way benchmark oil flows in the U.S. They also changed the price relationship in the futures market by creating a temporary glut in the main delivery point for crude contracts.
The reversal of the 500-mile (805-kilometer) Seaway pipeline from the trading hub at Cushing, Oklahoma, to refineries on the Gulf Coast is intended to clear a supply build-up that depressed prices of West Texas Intermediate oil traded on the New York Mercantile Exchange. The shift is attracting more oil to Cushing to meet demand once crude flows change direction. Inventories grew 6.4 percent to 32 million barrels in the past seven weeks, according to U.S. Energy Department data.
Increased stockpiles depressed crude for next-month delivery, making it less expensive than later futures so that investors have to pay more for each successive contract. January oil traded in contango, or at a discount to August crude, on Nov. 22 for the first time in a month, following the action by Enbridge and Enterprise six days earlier.
“We expect the WTI contango to increase in coming months as Cushing inventories rise in anticipation of the reversal,” David Greely, head of energy research at Goldman Sachs Group Inc. in New York, said Nov. 23 in a phone interview. “After the reversal of the Seaway, these barrels would move down to the U.S. Gulf Coast, drawing Cushing inventories back down and reducing the contango.”
Oil for January delivery gained 0.8 percent to $97.53 at 12:46 p.m. on the Nymex. That compares with $97.68 for the February contract, a premium of 15 cents, down from 20 cents on Nov. 23.
Over the past five years, oil for front-month delivery was in contango versus the contract for the next month 82 percent of the time. The front month was in backwardation, or more expensive than the next month, on 18 percent of trading days.
U.S. crude rose relative to Brent for January settlement last week on the London-based ICE Futures Europe exchange as Brent prices dropped $1.38, or 1.3 percent, to $106.40 a barrel on Nov 25. Between 2001 and 2010, WTI traded at a premium of 87 cents a barrel to Brent, according to data compiled by Bloomberg. With an influx of oil at Cushing, that flipped to a record discount of $27.88 on Oct. 14. The gap has since narrowed 63 percent to $10.38 today.
Refiners on the Gulf Coast have been forced to pay higher prices for imported oil because of a lack of transport from Cushing. Oil used on the Gulf has been linked to Brent, which is the benchmark for more than half of the world’s oil.
The Seaway line will operate with a capacity of 150,000 barrels a day by the second quarter of 2012, according to Enterprise and Enbridge. Pump modifications expected by early 2013 will boost that to 400,000 barrels.
Currently, there is 1.64 million barrels a day of pipeline capacity into Cushing and only 995,000 out, according to Martin Tallett, founder of EnSys Energy & Systems Inc., a Lexington, Massachusetts, consulting company.
Additional lines may be needed to handle increased production. Canadian output will jump 37 percent to 2.16 million barrels a day in 2015 from 1.58 million this year, the Canadian Association of Petroleum Producers said in June.
North Dakota, which produces oil from the Bakken field, almost doubled output in the past two years and pumped a record 464,129 barrels a day in September, according to the state government. Production may grow to between 1.5 million and 2 million barrels a day within five years, Katherine Spector, a New York-based analyst with CIBC World Markets Corp., said Nov. 22 at The Energy Forum in New York.
The Seaway reversal is replacing Enbridge and Enterprise’s Wrangler pipeline proposal, which would have carried as much as 800,000 barrels a day from Cushing to the coast by mid-2013, Rick Rainey, a company spokesman, said Nov. 16.
Enterprise and Energy Transfer Partners LP said Aug. 19 they wouldn’t move forward with plans to construct a separate 584-mile line from Cushing to Houston.
The State Department announced Nov. 10 it was delaying a decision on TransCanada Corp.’s proposed Keystone XL oil pipeline to study an alternative route for the $7 billion project that avoids environmentally sensitive areas in Nebraska.
Further study “could be completed as early as the first quarter of 2013,” said the department, which has jurisdiction over the line because it crosses an international border.
“Because of all the euphoria around Seaway, we’ve lost a lot of other news in the background,” said Amrita Sen, a London-based analyst with Barclays Plc. “A lot of key pipelines have actually been canceled.”
For now, January futures on the Nymex are cheaper than every contract through June, when prices turn lower than previous months. Oil for delivery in December 2012 trades at $97.58 a barrel, falling to $93.50 the following December and $91.08 in the same month of 2014.
The months closest to delivery will remain in contango until next year because of ample stockpiles at Cushing and a slowing economy, Harry Tchilinguirian, the London-based, head of commodity markets strategy at BNP Paribas SA, said Nov. 25 in a phone interview.
Oil for sale at a later date is lower, reflecting the concern of hedge funds about bullish bets when there is “uncertainty in the global economic outlook,” he said.
- Seaway Pipeline gets turned around; oil markets react quickly (mb50.wordpress.com)
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- Enbridge, Enterprise Products To Reverse Seaway Crude Oil Pipeline (mb50.wordpress.com)
- Oil in New York Surges Above $100 on Reversal of Seaway Pipeline (mb50.wordpress.com)
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