The Pipeline Role in the U.S. Energy Boom

The crude-oil production boom in the United States  is leading to an infrastructure rebirth as the oil industry scrambles to find a home for surging output. The reversal of the Seaway pipeline in 2012 to export oil from Cushing, Okla., to the Gulf Coast, rather than import oil, marked a sea change for the U.S. oil industry, and represented the start of a trend to move energy out of the Midwest.

There are several major pipeline projects being expanded to accommodate the new oil production, but even with capacity being expanded, it’s still barely keeping up with output, energy analysts say.

With the expansion for the Seaway pipeline completed in January, owners of the pipeline, Enterprise Products Partners and Enbridge, expected volumes to average 295,000 barrels daily (b/d) between February and May, up from 180,000 b/d in January. Seaway is also constructing a 512-mile pipeline designed to parallel the existing right-of-way of the current pipeline. The Seaway “loop,” as it’s called, will add 450,000 b/d of incremental capacity once completed, expected in the first quarter of 2014.

The Seaway pipeline is expected to carry crude from the Midwest, North Dakota’s Bakken field, the Permian Basin in West Texas and from Canada.

Keystone XL Impact

The best-known project is the Keystone XL pipeline, which could transport 700,000 b/d of crude from the oil sands in Alberta, Canada to the Gulf Coast via Cushing. The pipeline’s path caused controversy last year as originally it crossed some environmentally sensitive lands in Nebraska. Since then the path was redrawn and the state signed off on construction. It now awaits approval by President Obama.

In its review of the pipeline project, the U.S. State Department’s Draft Supplemental Environmental Impact Statement released in March, said there wouldn’t be a substantive impact on greenhouse gas emissions whether the pipeline was approved or not since Canadian oil sands production would continue and that this crude oil would find a home one way or another.

David Bouckhout, senior commodity strategist at TD Securities, said that finding by the State Department was key.

“While the aim of the draft wasn’t to provide an indication on a presidential permit, the details in the (report) did increase our optimism that the project will eventually receive the approval it needs from the U.S. president,” he says.

Matt Smith, commodity analyst at Schneider Electric, a global energy management company providing supply, demand and sustainability solutions, and author of the blog, The Energy Burrito, says the industry expects pipeline construction to begin in the second half of 2013.

Assuming Keystone is approved, Commerzbank analysts noted comments by pipeline operator TransCanada that they foresee pipeline commission in 2015. “In that case, the Canadian oil sand reserves would also be available to the refineries on the U.S. Gulf Coast and indeed to the world market,” they say.

A third important pipeline project is the planned reversal of the Longhorn pipeline from West Texas to the Gulf Coast, said Michael Wittner, analyst at Societe Generale. If all goes as planned it should deliver 225,000 b/d capacity during the third quarter. “This line will take crude that is currently flowing to Cushing, and will divert it directly to the (Gulf Coast) instead. At 225,000 b/d, Longhorn is almost as big as the 250,000 b/d Seaway expansion – so progress needs to be watched carefully,” he says.

 

Allowing More Crude Exports

Commerzbank analysts said the new pipeline capacity will allow more crude to flow from Cushing to the Gulf Coast, but as it stands, the oil may just sit at the Gulf and shift the glut from one region to another unless export restriction dating back to the 1970s oil crisis are lifted.

“The local supply surplus could be reduced to some extent if refineries were to process the oil and export the finished oil products, as is permitted by law. However, most refineries on the U.S. Gulf Coast are specialized in heavy oil refining and are likely to have little demand, if at all, for the light shale oil from the Midwest,” they say.

Once the Keystone XL pipeline is completed, there should be more pressure on the U.S. government to ease export restrictions, Commerzbank said.

Smith agreed that it’s likely these restrictions would be relaxed, but said not in the near-term. In the meantime, refined products exports, which aren’t subject to the restrictions, have skyrocketed, he said.

The movement of these products, along with all the pipeline expansions, is starting to affect the spread between WTI and Brent, which had widened in part because of the supply imbalance, which is in the single digits after rising to as high as $23 in February 2013.

Debbie Carlson has focused on commodities for much of her writing career. She spent more than a decade at Dow Jones covering the Chicago-based futures exchanges. As a Dow Jones editor, she worked closely with The Wall Street Journal and Barron's in planning commodities coverage.

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