Stairway to Houston – Lack of Pipeline Throughways Constrains Incoming Crude Flows

Pipelines delivering crude to Houston from the South Texas Eagle Ford are estimated to be half empty. Yet over 200Mb/d of crude is shipped from that basin to refineries in Houston and further east along the Gulf Coast by barge. One of the key reasons appears to be that local traffic congestion and a lack of adequate throughway pipeline capacity past Houston pushes barrels not needed locally onto the water to reach refineries in Louisiana. Today we explain the Houston crude traffic problem.

The First Episode of this series reviewed the evolving crude supply demand balance into the Houston refining region that has 9 refineries and two new 50 Mb/d condensate splitters that are processing an estimated 2.4 MMb/d of crude between them. Crude supplies into Houston refineries used to be predominantly waterborne imports but rising U.S. and Canadian production is increasingly replacing overseas feedstocks. In 2015 through May remaining waterborne imports were 0.9 MMb/d versus overland pipeline supplies that we estimated at about 1.5 MMb/d. Another 100 Mb/d of waterborne crude and condensate from the Eagle Ford are delivered to area docks by barge and tanker. These incoming supplies roughly balance with refinery demand. However - incoming pipeline capacity is less than 50% utilized even as more than 1 MMb/d of new pipes are expected online by early 2016 - suggesting that a lot more incoming crude is expecting to navigate the Houston area in the future (or that the incoming infrastructure is overbuilt).

In Episode 2 we looked at logistics challenges in the Houston area arising from crude quality differences between traditional imports that are heavy and medium grades and new domestic production that has been predominantly light crude or ultra light condensate. Existing refineries were built to process heavier crudes and can only handle so much lighter crude without investment and reconfiguration. That means heavier waterborne imports are still needed – although they are being slowly replaced by heavy crude coming by pipeline from Western Canada. At the same time changing interpretations of Bureau of Industry and Security (BIS) regulations governing the export of crude are now allowing exports of lightly processed condensate. However, that processed condensate requires segregation en-route to marine docks – complicating pipeline logistics. In this episode we look at the limited ways that crude coming into Houston by pipeline can currently bypass area congestion.

Developing pipeline infrastructure to get crude from U.S. shale basins to market has largely been a point-to-point endeavor – with midstream companies soliciting support from producers to build pipelines direct to destination markets. In the case of Houston area refineries two pieces of evidence suggest that this approach has not always been efficient. The first is that – as we detailed in Episode 1 a number of incoming pipelines to the Houston area are currently running less than half full – especially those from the Eagle Ford basin in South Texas. According to average Genscape flow estimates for 2015 through July – the Kinder Morgan Crude and Condensate pipeline (KMCC) is flowing at 49% of nameplate capacity and Enterprise Product Partners (EPD) Eagle Ford pipeline is running at 40% of nameplate capacity. At the same time evidence from our friends at ClipperData indicates that an average 200 Mb/d of crude is being shipped by barge along the Gulf Coast to Houston as well as to refining centers at Port Arthur, Lake Charles and in the Mississippi Delta – that might otherwise be reachable by pipeline. These waterborne crude movements cost more than equivalent pipeline tariffs (in part because the vessels used have to be Jones Act compliant – making their operating costs relatively high – see The Sea and Mr. Jones). In short, the available pipeline capacity to bring incoming light crude to Houston is not able to deliver crude east of Houston even as shippers are delivering crude to the east by barge.

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To understand why this is happening we delved a little deeper into the crude supply/demand balance for Houston we developed in Episode 1 as well as the crude quality analysis we did in Episode 2. These analyses showed that Houston area refineries – including the two new Kinder Morgan 50 Mb/d condensate splitters - are processing about 1.3 MMb/d of light crude. Nameplate capacity on incoming pipelines that are exclusively carrying light crude into Houston (Seaway 1, Longhorn, BridgeTex, KMCC, EPD Eagle Ford and the Texas Pipeline System) is just over 2 MMb/d but our estimates of current flows on those pipelines is about 1.2 MMb/d. Added to Eagle Ford barge deliveries (0.1 MMb/d) that totals 1.3 MMb/d of light crude delivered to Houston refineries – matching the volume of light crude processed locally. That implies light crude coming into Houston by pipeline simply feeds local refineries and is unable to travel past those refineries to points further east along the Gulf Coast. In other words the Houston pipeline system lacks adequate throughway capacity – if you like it is built for “local” traffic only – causing shippers to take to the water to deliver barrels further east.

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