Update: Canadian pipeline firms Enbridge, TransCanada sprint to end U.S. oil glut

Reuters via Calgary Herald ^ | November 16, 2011 | Anna Driver and Scott Haggett

[thackney]

Enbridge Inc and TransCanada Corp have raced forward with new pipeline plans in the fierce battle to unclog a year-long U.S. oil bottleneck, setting up a potentially swift collapse to an unprecedented distortion in crude markets.

After purchasing ConocoPhillips’ stake in the 350,000 barrel-per-day Seaway pipeline for $1.15 billion, Enbridge and new partner Enterprise Products Partners said they plan to reverse the line’s flow to send crude locked up at the Cushing, Oklahoma, oil hub to the Texas coast. That means they will not pursue a separate project unveiled in September.

Separately, rival TransCanada said it could begin construction of a similar Cushing-to-Gulf-Coast pipeline spur of its proposed Keystone XL pipeline early next year, pending consultations with the U.S. State Department which last week postponed approval of the full-length Canada-to-Texas line to study a new route.

The companies are racing to unlock a glut of crude in the U.S. Midwest, which has built up over the year due to rising supplies from Canada and North Dakota. They aim to ship it to the Gulf Coast where it will fetch a hefty premium and help producers achieve a higher price for their output, although it will also rob midcontinent refiners of the cheap crude they have enjoyed this year.

The news sparked a rapid narrowing in an oil spread that upended energy markets this year, spurred a rail oil shipping bonanza and roiled airline efforts to hedge fuel costs.

Oil traders reacted swiftly to the news. U.S. crude surged by nearly $2 a barrel while Brent crude remained $1 lower — narrowing the so-called Brent/WTI spread to below $10 a barrel for the first time since April.

The spread, rarely more than a few dollars in past years, surged this year due to ballooning inventories around the Cushing, Oklahoma, delivery point for the U.S. oil contract and hit a record $28 a barrel in October.

“Seaway’s full reversal has a net impact of around 400,000 bpd, which is a significant chunk but is still not the level needed to fully unlock the logistics bottlenecks (in the Midwest),” said Daniel P. Ahn, director and head of commodity portfolio strategy for Citigroup.

The reversed Seaway line could be in service at an initial capacity of 150,000 bpd by the second quarter of 2012, Enbridge said. Station additions and modifications needed to ramp up flow rates to 400,000 bpd will be completed by early 2013.

Enbridge and Enterprise also plan to construct a pipeline system to link Seaway into Enterprises’s existing ECHO crude terminal southeast of Houston to ease transport to regional plants.

Enterprise said it was not going to go forward with the proposed 800,000 bpd Wrangler pipeline, in which it planned to partner with Enbridge, to ship crude from Cushing to the Gulf.

Enbridge’s acquisition of the stake in Seaway is expected to be completed in December, ConocoPhillips said. Conoco, which traders said had resisted pressure to reverse the line because its midcontinent refiners were benefiting from the cheaper feedstock, had already said it was selling its stake.

Shares of U.S. oil refiners Valero Energy Corp and Marathon Petroleum Corp, which have Midwest plants that have enjoyed strong margins this year due low prices and high inventories, saw shares drop after news of the reversal.

TRANSCANADA TO PURSUE CUSHING-TO-GULF PLAN

TransCanada also sought to rally back from the crushing delay to its $7 billion Keystone XL pipeline, which had faced an upswell of environmental resistance. Unable to build the cross-border portion of the line without State Department approval, the firm now looked set to build a much shorter but critical leg connecting the Cushing hub to the Gulf Coast.

“TransCanada has not consulted with us about beginning work on the Oklahoma-to-Gulf portion of the pipeline,” a senior State Department official said.

The southern portion of Keystone XL, including a $600 million lateral line from Keystone’s southern terminus to Houston, would carry up to 830,000 barrels of crude a day to the Gulf Coast.

Alex Pourbaix, president of the company’s oil pipelines division, said TransCanada is hearing from shippers that they would like construction of the line to proceed even as it waits for full approval of Keystone late next year or in 2013.

The Nebraska legislature on Wednesday voted to advance a proposed law that would reroute the Keystone XL pipeline to avoid the sensitive Sandhills and Ogallala aquifer, which had become a major rallying issue for green groups opposing it.

CONOCO SELL OFF

As part of the deals announced on Wednesday, Conoco also said it will sell its 16.55 per cent interest in Colonial Pipeline Co and Colonial Ventures LLC to a subsidiary of pension fund Caisse de depot et placement du Quebec for $850 million.

Caisse, Canada’s largest pension fund administrator with C$199 billion in assets under management is among the Canadian pension funds who are increasingly looking toward direct investments in the resources sector, having emerged from the global financial crisis as some of the world’s most deep-pocketed private equity investors.

Conoco’s pipeline deals, part of its strategy to shed assets it no longer considers strategic, totalled $2 billion, the U.S. oil company said.

The deals are part of the company’s effort to improve its valuation with up to $20 billion of asset sales targeted to properties the company no longer considers strategic. Conoco, the third largest U.S. oil company, also has plans to spin off its refining assets next year

[thackney]

Seaway Pipeline Reversal To Ease Midwest Oil Supply Glut
http://online.wsj.com/article/BT-CO-20111116-711080.html

excerpted:

The discount of Nymex crude, which is priced at Cushing, Okla., narrowed by more than $3 Wednesday to about $10 a barrel in the wake of the announcement. That discount had hit a record of $27.88 in October.

“What you’re going to see is WTI more closely aligned with your global crude prices,” said Brian Milne, refined fuels editor at Telvent DTN.

Light, sweet crude for December delivery recently traded up $2.07, or 2.1%, to $101.45 a barrel on the Nymex. At one point it touched $102.29 a barrel, its highest level since June.

Brent recently traded down 80 cents, or 0.7%, at $111.38 a barrel.

Pending regulatory approval, the 500-mile pipeline could ship an initial 150,000 barrels of oil a day from Cushing to the Houston-area refining market by the second quarter of next year, Enbridge and Enterprise said.

[thackney]

Recent gasoline and diesel prices track Brent and LLS, not WTI
http://www.eia.gov/todayinenergy/detail.cfm?id=3670
October 27, 2011

Since the beginning of 2011, the spot price of West Texas Intermediate (WTI) crude oil, a traditional benchmark for the U.S. market, has trailed the spot price of other crude oils, including Brent, a global benchmark, and Louisiana Light Sweet (LLS), a Gulf Coast crude oil similar to crudes run by many U.S. refiners. Because few U.S. refiners have easy access to WTI crude oil, this price divergence has not directly translated to lower prices for U.S. refined petroleum products, such as gasoline and heating oil. Instead, these product prices have more closely tracked the prices of Brent and LLS. Through October 25, the prices of Brent and LLS are up 20% and 18% in 2011, respectively; the prices of wholesale diesel fuel and gasoline on the U.S. Gulf coast are up 21% and 13%, respectively; meanwhile, the price of WTI is up just 2%.

The crude oil price divergence can be a source of confusion when determining the price drivers for refined petroleum products such as diesel and gasoline. The main determinant of refined product prices is the crude oil input cost because it is the largest variable cost that refiners face. The price of WTI is commonly used by many sources as a proxy for the "price of crude oil" because it is the underlying physical crude oil for the NYMEX light sweet crude oil futures contract, which is the most frequently traded crude oil instrument.

WTI represents the spot price for crude oil at Cushing, Oklahoma, the physical delivery hub for NYMEX light sweet crude oil futures contracts. However, because transportation constraints make it easier to bring crude to the Midwest (including Oklahoma ) than away from the area, relatively few U.S. refiners have the ability to benefit from the currently discounted WTI prices. Given price movements this year, using WTI as a proxy for a market-wide oil price could mislead people to the conclusion that crude oil prices are down, thus, product prices should also be down.

In actuality, there are as many prices of oil as there are various grades of crude oil. Historically, the prices of various crude oil grades have moved together with some differences to account for quality variations and transportation costs. In 2011, this relationship has not held for WTI.

[Mr. K]

so build the pipeline to the border and we can truck it in for now

give me the contract

I’ll even set up a few refineries near the border

[PSYCHO-FREEP]

It’s almost funny that just yesterday, there was a thread that voiced confusion for why prices at the pump were so low, when supplies were also so low across the nation.

It just proves that supply and demand really is the driving force after all and the general public is painfully ignorant.

I would welcome a reduced volume at the moment myself. I have large amounts of actual stock in several wells in North Dakota, which have hit really big, but are waiting for market volume to subside. I’m patient, I can easily wait for the coming surge.

The American Dollar is being destroyed as we speak and nothing what so ever is being said about it. This alone will soon drive Crude prices into the $200 range. (Not to mention Gold and Silver.)

[Buckeye McFrog]

So if I read this correctly we can expect surging gas prices soon as a direct result of Obummer’s decision to punt on the Keystone Pipeline?

[Presbyterian Reporter]

Once again Obama dumps on the American Public by refusing to approve the pipeline from Canada. As a result the price of WTI crude oil goes up because traders know there will not be a surplus of oil from Canada.

[thackney]

I’ll even set up a few refineries near the border

Then you'll need to build some more pipelines, to carry the additional refined product. And we don't have a shortage of refineries; the US has become a net refined product exporter.

[thackney]

It is a poor title of the original article.

There is not a US oversupply, but a regional at Cushing, Oklahoma on up through Montana, North Dakota.

[thackney]

[pitviper68]

http://grassrootsne.com/?p=14125 TransCanada Trojan Horse: Keystone XL Pipeline Will Increase Gas Prices ■The fifteen state Midwest region, PADD II, is oversupplied with Canadian heavy crude and currently receiving “a discount” (translation: selling for a lower price) ■Keystone XL will “strengthen” (translation: increase) prices for Canadian producers by removing oversupply ■Keystone XL provides additional benefit for transport out of any synthetic crude oversupply in Midwest (PADD II) “to mitigate a price discount” (translation: avoid price reductions) ■All Canadian producers should benefit from resulting price increases (estimated at $2 – $3.9 billion) Market analyst Philip Verleger projected a $.10 – $.20 increase in cost per gallon as a result of the project, in his editorial entitled, “If gas prices go up further, blame Canada“, in the March 13, 2011, edition of the StarTribune.

[thackney]

Notice most of PADD 2 is not a noticable discount from the other non-coast areas.

http://www.gasbuddy.com/gb_gastemperaturemap.aspx

Looks more a case of the refineries making a better margin than the end consumer getting a break.

[thackney]

If the claim of that article was true, then those midwest states would have a lower price, relative to the national average, bigger now than it was a few years ago. The trends show that to be false.

Where is the savings that article claims those people have been getting lately?