During the days when Gulf Coast refineries were dependent on crude imports for the majority of their feedstocks, tankers delivered crude from overseas markets. Those same tankers also played an important role in preventing refinery supply disruptions because they acted as a floating storage component in the supply chain. With waterborne imports to the Gulf Coast declining as domestic and Canadian production is increasingly delivered by pipeline, the buffer provided by floating storage will be much reduced. Today we continue our series looking at Gulf Coast crude storage needs in the shale era.
In Part 1 of this series covering the changing crude storage situation at the Gulf Coast – home to 50 % of US refining capacity - we discussed how storage provides a buffer or slack in the distribution chain from wellhead to refinery. Without storage, production shut-ins would be more frequent and refineries would potentially run out of crude or be overwhelmed by too much supply. Most refiners maintain a 5-8 day onsite crude supply and then rely on upstream storage to smooth out bigger supply disruptions. Since the 1980’s declining domestic production led to most US Gulf Coast refinery feedstock needs being met by waterborne imports that typically arrived from overseas in large crude supertankers. Because most Gulf Coast region refineries are accessible by water, crude distribution from supertankers was accomplished using a mix of waterborne barge and tanker deliveries as well as the cavern system at the Louisiana Offshore Oil Port (LOOP). Waterborne vessels provide flexible storage that can help handle refinery outages and other demand shocks by redistributing excess crude to other nearby refineries or facilitating delivery of crude sold back into the market as needed. Now that US domestic and Canadian crude production is booming, Gulf Coast imports are declining such that the floating storage buffer is reduced. These days more crude is delivered to Gulf Coast refineries by pipeline or by rail.
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In this episode we walk through the first of a two part analysis designed to understand the importance of floating storage to waterborne refinery markets. We look specifically at the Houston market on the Texas Gulf Coast. This region is the first to experience the impact of the flood of new domestic and Canadian crude production that began to reach Gulf Coast refineries last year and has increased this year. Crude pipeline capacity into the Texas Gulf Coast region (Houston and Beaumont/Port Arthur) increased by 775 Mb/d in 2013 and is projected to increase by nearly 1.9 MMb/d in 2014 with new flows from Cushing and West Texas. What will be the impact on Houston refinery supply of this change in the delivery mechanism and will new and planned onshore storage capacity be adequate to take the place of floating storage?