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Energy Markets: Shale Boom Cuts Gulf Oil Premium to 24-Year Low

By Dan Murtaugh
September 07, 2012

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.

Energy Independence

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.

African Imports

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.

Midcontinent Glut

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.

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Enbridge to increase Seaway capacity

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Enbridge announced plans to expand the Seaway pipeline and its Flanagan South project

 

Josh Lewis ,
27 March 2012 04:45 GMT

Canadian pipeline operator Enbridge has announced plans to more than double the capacity of its Seaway oil pipeline following increased demand.

Enbridge and its partner Enterprise Products Partners will build a 512 mile, 30 inch diameter twin line that will run along the route of the Seaway pipeline from Freeport, Texas, to Cushing Oklahoma.

The addition will increase the capacity of the pipeline by 450,000 barrels per day to 850,000 bpd.

Enbridge said the expansion was supported by additional commitments received during the supplemental binding open commitment period, with terms ranging from five to 20 years.

Enbridge also announced it planned to proceed with the expansion of its Flanagan South project which would add incremental capacity for shippers seeking transportation from Flanagan, Illinois, to the US Gulf Coast.

The Flanagan South pipeline will also be used to transport some of the additional commitments for the Seaway pipeline from Flanagan to the Seaway System.

“Expansion of the Seaway pipeline, along with Enbridge’s Flanagan South project, will provide crude oil producers in the Bakken region and other emerging crude oil sources capacity to move secure, reliable supply to US Gulf Coast refineries, offsetting supplies of imported crude,” Enbridge chief executive, Pat Daniel, said in a statement.

Enbridge said the first phase of the reversal of the Seaway pipeline was nearing completion and would provide 150,000 bpd of southbound takeaway capacity from Cushing to the Gulf Coast by 1 June.

It added pump station additions and modifications, which are expected to be completed by the first quarter 2013, would increase capacity to 400,000 bpd, assuming a mix of light and heavy grades of crude.

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Seaway – Echo terminal link planned

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News wires  02 March 2012 02:57 GMT

The proposed pipeline would be about 40 miles long, Enbridge executive Brad Shamla told Reuters.

“We are shipping crude out over a dock to other destinations on the Gulf Coast,” he said.

Following this, another pipeline would be laid, this one from the Echo terminal, along the Houston Ship Channel, to the Port Arthur area of Texas on the border of Louisiana.

Shamla said that pipeline will be about 80 miles in length and be done in 2014.

The plan was announced as the companies continued their purging of the 500-mile Seaway pipeline, which they said was ahead of schedule.

The pipeline will begin by carrying 150,000 barrels per day by 1 June from the oil hub of Cushing, Oklahoma, to Gulf Coast refineries, said Shamla.

The pipeline is the first of several projects to siphon the glut of crude oil sitting in Cushing to the refineries along the Gulf Coast.

The reversed Seaway pipeline capacity is expected to grow 400,000 bpd in 2014 but could increase more if the current open season seeking more firm shipping commitments is successful, Reuters reported.

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