I Need a Barrel - Two More New Crude Oil Pipelines from Hubs to Refineries

There is a story behind every new crude oil pipeline built to supply a decades-old refinery. After all, the refinery surely had a well-established crude-delivery system in place –– why change horses now, especially with refinery margins under so much pressure? Typically, the answer is that, well, times have changed. Or, more specifically, the Shale Revolution has up-ended traditional crude sourcing, forced refinery owners to rethink their crude slates, and opened up opportunities to access new, lower-cost oil. Today, we continue our look at these new pipeline connections, their rationales, and their effects on other pipelines, barge deliveries and crude-by-rail.

In Part 1 of our series, we noted that new pipelines to increase crude oil takeaway capacity from major producing areas to oil storage and distribution hubs like Houston, TX and Cushing, OK seem to garner most of the media’s attention. Just outside the spotlight’s glare, though, midstream companies are building several “demand-pull” pipelines to move crude to refineries more efficiently, and to give refineries easier, cheaper access to new, desirable supplies. We noted that U.S. refineries –– and most of the crude oil delivery infrastructure that supplies them –– were built many decades before the Shale Revolution enabled vast quantities of oil (and natural gas and natural gas liquids) to be freed from the shale and/or tight sands of the Permian, the Eagle Ford, the Bakken and other big-name plays. Rapid production growth from these new plays forced a major rethinking –– and re-plumbing –– of the nation’s crude-delivery infrastructure; slashed oil imports (especially lighter crudes); and led a number of U.S. refiners to revamp their oil-processing facilities to allow the use of more domestically sourced crude.

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As our first example, we considered Valero Energy’s $200 million-plus investment in its 195-Mb/d Memphis, TN refinery so it can process more light sweet oils, and Valero’s decision to co-develop (with Plains All American) the planned 440-mile, 200-Mb/d Diamond Pipeline from Cushing to Memphis (estimated in-service date: late 2017). Diamond’s two-pronged rationale: access to Cushing’s cornucopia of crudes (a lovely alliteration, we might add) and considerably lower crude-delivery costs. (At least some of the Memphis refinery’s crude currently is railed down to St. James, then piped up and over to the Home of the Blues via Capline and Collierville –– a circuitous and expensive trip.)

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