New pipelines are beginning to carry a glut of domestic crude from the middle of the country to Texas’s Gulf Coast, boosting the fortunes of the area’s big refineries and further fueling a decline in oil imports. Dan Strumpf reports.
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.
Oil refineries like this one near Houston are expected to benefit from new pipelines carrying less-expensive crude from inland and Midwest sites.
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.
Valero will realize profit margins of $12.80 per barrel from 2013 to 2017, compared with $10.50 in 2011 and 2012, estimates investment research firm Morningstar. 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 which 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 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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A version of this article appeared June 25, 2013, on page B1 in the U.S. edition of The Wall Street Journal, with the headline: Texas’ Next Big Oil Rush.