Draggin the Capline – Utilization on Capline is below 14%. Would it make sense to reverse this crude pipeline too?

Crude oil wants to flow south to the U.S. Gulf.  Seaway is being reversed.  TransCanada is building the Cushing-to-Gulf leg of Keystone XL, hang presidential permits. West Texas Gulf pipeline is expanding capacity from the Permian to Gulf refineries by 100 Mb/d.  Magellan is converting its Longhorn products pipeline to crude service, which will add another 135 Mb/d of Permian-to-Gulf capacity.  Crude oil production from the midcontinent to the Bakken is growing and reversing the traditional south-to-north flows to move north-to-south.  …Except for Capline, which continues to move barrels north from St. James, Louisiana to Patoka, Illinois.  [Posted by contributor Sandy Fielden]

Rusty Braziel is quoted this morning in a Wall Street Journal article “Planned Pipelines to Rival Keystone XL” by Tom Fowler.  Article addresses Seaway and the Enbridge Flanagan projects.  See http://online.wsj.com/article/SB10001424052702304177104577305980790538586.html

It is a huge system – 40” diameter, 632 miles long, 1.2 MMb/d of capacity.  Capline has been a key flow corridor for the Midcontinent refining system for more than 30 years.  But today Capline is dragging -- with utilization down to 14% or less.  What’s going on with Capline volumes?  Would it make sense to do the same thing with Capline as Enterprise and Enbridge are doing with Seaway – reverse the system and take barrels to the Gulf?  Let’s look at the situation to see what makes sense.

Makin’ a living the old hard way

Moving crude to Patoka day by day

But now refiners like Canadian crude instead of mine

Draggin’ the Capline (draggin’ the Capline)

                                                                                                           Apologies to Tommy James

Background.  The Capline System is a high-volume crude pipeline linking Gulf of Mexico and foreign crude supplies to key refineries throughout the Midcontinent.  The operator is Shell but recently Plains became the largest interest holder.  Capline was built to provide access for Midcontinent refiners to crude production and imports from the US Gulf. Capline originates in St James LA, close to New Orleans. The St. James terminal has two active docks capable of handling approximately 600,000-barrel import tankers. St James is also connected to Louisiana Offshore Oil Port (LOOP) via the 53 mile LOCAP pipeline. LOOP consists of 3 mooring buoys 18 miles off the coast of Louisiana where ultra large crude tankers can unload.  Cargoes are pumped onshore and stored in up to 53 MMb of cavern and tank storage. LOOP also receives domestic crude production from the Gulf of Mexico.

Once Capline delivers crude oil to Patoka it can be used by refiners in the area, or the barrels cam move on to other destinations in the mid and upper Midwest. For example, the Capwood Pipeline connects Patoka to the crude terminal in Wood River, IL that feeds upper Midwest refineries and the Chicap Pipeline delivers crude to Chicago refiners. In addition to Capline, Patoka is an important crude oil crossroads linking to Cushing OK via the Ozark pipeline and to Western Canada via the Keystone Pipeline.

Prices Upside Down.  Historically crude oil moved from St. James to the higher priced markets in the midcontinent, pegged to Cushing prices.  As described in my RBN postings ‘You’ve got to know when to hold ‘em, know when to fold ‘em; Trading the Brent – WTI spread’ from March 12-13, that situation changed dramatically in early 2011.  Lately St. James has been $20/bbl to $25/bbl above WTI.  Crude prices at Patoka are still set by differentials to Cushing WTI. This means there is no economic incentive to move crude up from the more expensive Gulf on Capline.

Impact on Volumes.  The upside-down differential has had a dramatic impact on Capline volume. Plains’ Annual Report indicates that throughput averaged 160 Mb/d during 2011 or 14 % of capacity. Data from Genscape (see Graph below) confirms that this trend is continuing. The graph indicates that throughput on Capline dropped to the 100-200 Mb/d range in the middle of 2011, just after Keystone volumes into Patoka jumped to the 450 Mb/d level.  [Thanks to Genscape for this data.] Thus refineries sourcing crude from Patoka are now getting significant barrels from Keystone, and volumes on Capline have been hit hard by the competition.  Recent Capline volumes are below 100 Mb/d.

Moving Diluent to Alberta.  It could be worse.  Based on discussions with market players, a significant portion of the barrels moving on Capline are not crude oil destined for Midcontinent refineries, but instead are diluent barrels destined for the Southern Lights pipeline.   These diluent barrels are mixed with super-heavy Canadian oil sands crude in Alberta to make a “Dilbit” blend that can be transported by pipeline to U.S. markets (see It's a Bitumen, oil - Does it go too far?).  From this perspective, Capline crude oil capacity is almost empty.  In fact, Reuters reported a couple of days ago that the pipeline is only running every other day due to low throughput requirements.

Does it make sense to reverse?  Clearly the need to use Capline to move barrels north has all but disappeared.  But does that mean it makes sense to use Capline to move barrels south?  The logic looks marginal at best, for three key reasons:  First, there is not enough supply to fill the line going south.  There is a lot of demand out of Patoka and the lines bringing crude into Patoka are at high utilization rates most of the time.  These are the refineries that are being upgraded to run more heavy Canadian oil, which will further increase their demand.   Second, there is a lot of new pipeline capacity being built from Cushing to the Gulf.  Capacity moving south on Capline would compete directly with the reversed Seaway, the south end of Keystone XL and other expansions mentioned above.  Third, it would be expensive to reverse Capline.  It is a large diameter system with a huge line fill requirement.  It would be a big economic stretch to justify the expense of conversion.

Summary.  With the data we have available, it looks like Capline is a system with minimal utility to move crude either north or south.  But we also note that Plains just acquired an additional interest in the system.  There is little doubt that Plains has a plan to do something with this system, probably something that today is off the radar screen.  Wait for the next signpost.  As Tommy James says,

I’m gonna take my time I’m gettin’ the good sign

Draggin’ the line (draggin’ the line)

"Draggin' the Line" was a hit for Tommy James in 1971 and was his biggest hit as a solo artist.  I reached #4 of the Billboard Hot 100 chart on August 7, 1971.

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