Crude Storage

Back in late March and early April, U.S. refineries responded to the sudden falloff in demand for jet fuel and motor gasoline by quickly ramping down their operations. Similarly, E&Ps in recent weeks have reacted to sharply lower demand for crude oil by slowing — or even suspending — their drilling activity and shutting in wells. Midstream companies’ actions have generally been more muted, though. While many midstreamers have ratcheted back their planned 2020 capital spending plans, the bulk of their major crude oil, natural gas and NGL projects already under construction are staying on-plan. Most of the rest are only being delayed by a few months, and a handful are either being reworked or deferred indefinitely. Today, we consider the midstream sector’s seemingly modest response to the crashes in crude oil prices and demand.

It’s been a good couple of years for many of the midstream companies active in the Bakken. Crude oil-focused drilling and completion activity has rebounded from a mid-decade slump, flows through their crude and gas gathering systems have been rising, and gas processing constraints that had threatened continued production growth have been on the wane. All that has led Bakken producers to plan for further gains in output in 2020 –– though that may change as the economic effects of the coronavirus become clearer. In any case, production growth is only possible if there’s sufficient gathering infrastructure in place to handle it. Today, we continue our series on crude-related assets in western North Dakota with a look at two midstreamers that have experienced big gains in their Bakken crude-gathering volumes.

The Bakken was among the first plays to benefit big-time from the Shale Revolution, experiencing a 400%-plus increase in crude production in the first half of the 2010s. The play has had more than its share of challenges, however, including a serious lack of takeaway capacity that spurred the first rapid deployment of modern-day crude-by-rail, followed by a rig-count collapse and major production decline after the mid-decade crash in oil prices. But the Bakken has been roaring back. Crude output there now tops 1.5 MMb/d — some 250 Mb/d higher than its late-2014 peak — and producers have been planning for continued production growth in 2020, though many may be reassessing those plans in light of this week’s coronavirus-related price slide. In any case, production growth is only possible if there’s sufficient gathering infrastructure in place to handle it. Today, we continue our series on crude-related infrastructure in western North Dakota with a look at a leading Bakken midstreamer’s assets.

Of the many midstream companies with Permian crude oil gathering systems, a few also own bigger-diameter pipelines that shuttle crude to regional hubs as well as even larger takeaway pipelines to the Gulf Coast. Noble Midstream Partners is one of those that employs this “well-to-water” strategy, which enables midstreamers to participate in multiple links of the value chain; it can also give them better control over oil quality as crude makes its way from wells in West Texas and southeastern New Mexico to coastal refineries and export docks hundreds of miles away. Today, we conclude our series on Permian crude gathering with a look at the master limited partnership’s (MLP) mix of gathering, shuttle and long-haul pipelines.

Crude oil gathering systems in the Permian and elsewhere are, by their very nature, evolving things. They increase in mileage and crude-carrying capacity as new wells are drilled and completed, and it’s not uncommon for smaller systems to be consolidated into larger ones. It’s also become typical for the ownership of these systems to change — sometimes year to year — as early investors cash in on what they’ve developed, and buyers see opportunities to rake in increasing revenue and take their newly acquired systems to the next level. Also, owners of neighboring systems sometimes form joint ventures that combine their assets, all to make their operations work better for their producer customers. Today, we continue our series on Permian gathering with a look at Brazos Midstream’s crude gathering system in the Delaware Basin, which has experienced considerable evolution.

Since the ban on exports of U.S. crude oil was lifted in December 2015, export volumes have soared, and for the week ending October 27, 2017, they surpassed 2 million barrels/day (MMb/d) for the first time ever, according to Energy Information Administration (EIA) statistics. And while exports slowed last week, it is clear that there’s more to come. But the pace of export growth depends on many things, including the ability of Gulf Coast infrastructure to receive and store increasing volumes of West Texas Intermediate (WTI), SCOOP/STACK, Bakken and other crudes and load it onto ships — the bigger the ship the better. Fortunately, coastal Texas and Louisiana already had extensive crude-related infrastructure in place when the export ban ended just under two years ago, and elements of that have been repurposed to handle exports. Will it be enough? Today, we begin a new blog series on existing and planned storage facilities and marine terminals targeted to support rising U.S. crude oil exports.

With crude storage tanks along the U.S Gulf Coast nearly full, the nine storage terminals currently operational in the Caribbean offer an advantageous close-by alternative. Right now these terminals are heavily used by Venezuela for oil blending and distribution, but there has been growing interest and investment from outside the region. China is now neck and neck with the U.S. as the world’s largest crude importer and is making a significant strategic investment in Caribbean storage to cement crude supply deals with Latin American producers. Private equity fund ArcLight Capital and trader Freepoint Commodities together purchased a huge terminal and shuttered refinery in the U.S. Virgin Islands in January of this year (2016) and have leased most of the working storage to Chinese-owned Sinopec. Today, we examine the growing role of Caribbean crude terminals. (This blog is based on Morningstar’s recently published Caribbean Crude Storage Outlook [1], which provides a comprehensive analysis of this evolving market.)

The reversal of Shell’s Zydeco Pipeline (formerly Ho-Ho) in 2013 was a big deal. It enabled eastbound flows of a wide range of crude streams from the Houston area to the storage and distribution hub at St. James, LA and from there to a dozen nearby refineries. Soon, though, Zydeco (named for the region’s Creole music) was running full and shippers were competing for space, spurring midstream companies to consider further enhancements. New pipeline capacity being developed is planned to come online later this year and in 2017, but—with ever-changing market dynamics—will it all be necessary? In today’s blog, “Take the Long Way Home—Easing Crude Pipeline Constraints to St. James,” Housley Carr begins a series on new pipeline capacity to St. James, and whether it will meet (or exceed) market needs.

A year ago (April 2015) the price spread between Light Louisiana Sweet (LLS) the St. James, LA benchmark light crude and Permian West Texas Intermediate (WTI) delivered to Houston was roughly $2.50/Bbl. In the first quarter of 2016 – following the end of the crude export ban and the crash of crude prices below $40.bbl – that spread narrowed to 30 cents/Bbl. This price differential change has thrown a wrench into traditional Gulf Coast price relationships that encouraged the flow of crude east from Houston to Louisiana. Further changes are expected as pipeline projects due to be completed in the next two years will deliver Bakken and Permian crude direct to St. James. Today we wrap up our series on St. James with a look at changing crude prices and flows.

Two midstream operators have added at least 13 MMBbl of crude storage to the St. James hub during the past 8 years (NuStar and Plains All American). These companies have invested in the hub because of its proximity to the Gulf Coast and pipeline connectivity to refineries throughout the Eastern U.S. and as far northwest as Edmonton, Alberta. St. James has also been an active recipient of crude flowing east across the Gulf by barge and tanker from the Eagle Ford via Corpus Christi. These crude movements require terminal, storage and blending facilities. Today we describe crude storage facilities at St. James.