New pipelines are beginning to carry a glut of domestic crude from the middle of the country to Texas' Gulf Coast, boosting the fortunes of the area's big refineries and further fueling a decline in oil imports.
New pipelines are beginning to carry a glut of domestic crude from the
middle of the country to
Texas
'
Gulf
Coast
,
boosting the fortunes of the area's big refineries and further fueling a
decline in oil imports.
Magellan Midstream Partners' Longhorn pipeline began shipping oil from West
Texas to Houston in April--the first of at least seven pipeline projects that
could send as much as two million barrels a day from oil-saturated choke points
in Oklahoma and the interior of Texas to the largest concentration of
refineries in the country. But domestic oil production is at such a high level
that the
Gulf
Coast
refineries won't be able to process all of the crude.
The pipelines, all set to come online by the end of next year, mark a new phase
in the U.S. oil boom. Hydraulic fracturing has pushed U.S. oil output to its highest
level in 17 years, but without adequate pipelines, much of the crude has been
trapped at storage facilities, including domestically produced light, sweet
crude at the massive storage hub in Cushing, Okla.
Because that Oklahoma crude is relatively stranded, its price is depressed
compared with prices of oil stored in other parts of the U.S. and in Europe. But
with the new pipelines, as well as increased use of rail cars and barges to
move crude, Cushing prices are expected to rebound.
Light, sweet crude at Cushing is now trading at a discount of about $6 a barrel
from imported European Brent crude, but far less than the $20 discount in
February. Goldman Sachs Group Inc. says the discount could narrow to $5 by the
third quarter as more pipeline capacity becomes available.
Refiners on the
Texas
Gulf
Coast
,
which process about a quarter of
U.S.
gasoline, are poised to be the beneficiaries of the new pipelines. They have
been largely stuck paying for more-expensive imported crude, or paying extra
transport costs to have the cheaper, stranded
U.S.
crude
brought in on rail cars, which are generally more costly than pipelines.
Valero Energy Corp., Phillips 66 and Marathon Petroleum Corp., as well as Exxon
Mobil Corp., which runs a major refinery in
Baytown
,
Texas
, all
stand to gain. Morningstar anticipates that Valero will realize profit margins
of $12.80 per barrel from 2013 to 2017, compared with $10.50 in 2011 and 2012. Phillips
66's margins are projected to grow to $13.50 per barrel, from $11.40.
Refineries in the
Midwest
, meanwhile, may see adverse
consequences. They have benefited from the regional glut, buying the low-price
crude but selling gasoline at the same prices as their coastal competitors. (The
price at the gas pump in the
U.S.
is
determined by the higher cost of imported crude.)
Investors are already betting that Midwestern refiners' profit margins will
fall. Shares for CVR Energy Inc., which produces fuel in
Oklahoma
and
Kansas
, fell
4.3% Monday as the
West Texas
crude-oil discount continued
to deteriorate.
However,
Texas
refiners won't be able to take full advantage of the influx of
U.S.
oil,
most of which is of the variety known as light sweet. That is because many of
those refineries were modified years ago to also deal with heavier crudes from
Mexico
,
Venezuela
and
Saudi
Arabia
, preventing significant
portions of their plants from refining light crude.
"It's rare to find a refinery down there that can take the majority of its
crude" from the
U.S.
supply of light, sweet oil, said Cowen Securities analyst Sam Margolin.
Some industry experts think the pipelines will simply ease the oil glut in
Cushing and create one in the
Houston
area
as
U.S.
crude
pours into the area faster than refiners can process it. Trying to sell the
crude abroad instead won't provide refiners a relief valve:
U.S.
law
prohibits most crude exports, although refined products can be shipped
overseas.
"We think the U.S. Gulf Coast gets saturated" with U.S. and Canadian
crude once the pipelines are completed, said Greg Garland, CEO of Phillips 66,
the independent refiner that spun off from ConocoPhillips last year. If that
occurs, Mr. Garland said more crude will instead have to move to the East and
West coasts by rail.
The arrival of more U.S. light, sweet crude on the Texas Gulf Coast is
displacing imports of similar crude from Nigeria and Angola, which dropped to
their lowest levels in about a quarter of century last year, a concern that was
aired at the most recent OPEC meeting in May.
The competition from the new light crude arriving in
Houston
could
push down the prices paid by
Gulf
Coast
refiners for
Gulf of Mexico
oil, said Alex Morris, energy
analyst at Raymond James. But it is unlikely that deep-water production would
be curtailed, he added, because onshore production is easier to shut off if
prices go down.
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