Last week (February 19, 2015) Enterprise Product Partners announced the start of line fill on their 780 Mb/d ECHO to Beaumont/Port Arthur pipeline. The new route will open access for Canadian heavy crude shippers on the recently completed Seaway Twin pipeline from Cushing to Houston to 1.5 MMb/d of refining capacity in Beaumont/Port Arthur including 0.3 MMb/d of heavy crude coker processing. These refineries were a key target of the Keystone-XL pipeline from Canada to the Gulf Coast that still awaits approval. Today we look at demand and competition for Canadian heavy crude on the Texas Gulf Coast.
Alan Greenspan coined the phrase "irrational exuberance" during his tenure as Federal Reserve chairman. He used it in a 1996 speech in reference to the excessively high prices of "dot-com" companies. He worried that assets were overvalued. Four years later, the dot-com bubble burst, confirming his concerns. Presently we are observing the last gasps of irrational exuberance in petroleum. Call it "petro-exuberance." This malady became apparent during a session on oil market issues at the World Economic Forum in Davos, Switzerland. Some panelists clearly had a case of irrational exuberance, an overenthusiasm no different from what we saw at the end of the dot-com and the housing crises.
Arnold Schwarzenegger said “Hasta la vista, baby” to the governor’s office in Sacramento four years ago, but his 2007 executive order establishing a low-carbon standard for transportation fuels is only now starting to have a real effect on California refineries. Some refiners say the rule aimed at reducing “life-cycle” greenhouse gas emissions from the transportation fuel sector 10% by 2020 is unrealistic and could result in refinery closings and gasoline and diesel shortages. Others say California’s goal is achievable. Today, we consider the Golden State’s low-carbon fuel standard (LCFS) and what it may mean for refiners.
While producers are licking their wounds after a more than 50% oil price crash, refiners have continued to enjoy healthy margins – even in the face of the largest refinery strike since 1980. Strong refining margins, supported by an ongoing boom in refined product exports, continue to encourage high levels of refinery utilization in the Gulf Coast region – home to more than 50% of U.S. refining capacity. Today we look at how Gulf Coast refiners are faring after the oil price crash.
Can it make sense for a producer to drill a well in today’s low price environment even if the rate of return on that well is below zero? Surprisingly the answer is yes, and the issue has important implications for the impact lower prices will ultimately have on U.S. oil and gas production volumes. Factors such as lease requirements can incentivize drilling and cause production levels to continue growing, even when spot prices don’t seem to support it. As the new economics of lower oil, NGL and natural gas prices suggest that production declines are just down the road, the market’s quest to nail down when and how much production will decline has brought the role of “hold by production” (HBP) drilling into the spotlight. Questions about HBP status and its role in producers drilling strategies have been a staple in the latest round of earnings calls.Today we take a closer look at HBP drilling.
While many companies in the energy sector – particularly in the producer community – are licking their wounds and reporting lower profits and reduced capital expenditure to their stockholders this quarter, refiners have continued to thrive. Lower refined product prices have begun to increase domestic consumption of gasoline and diesel in the face of longer-term decline trends. And strong refining margins continue to encourage high levels of refinery utilization. Today we start a two-part look at how U.S. refiners are faring after the oil price crash.
Since December the first significant volume of Canadian heavy crude - an average of 240 Mb/d - has flowed to the Gulf Coast on the Seaway Twin pipeline. It’s been a rocky road to the Gulf Coast for Canadian heavy crude producers – beset with delays and congestion that they probably never envisioned when they planned their oil sands projects (including the wider political battle over Keystone – currently back in the President’s hands.) And Canadian crude that does make it to Gulf Coast refineries faces stiff competition from incumbent suppliers. Today we chart the progress of the Seaway Twin and Flanagan South pipelines and look at price competition for heavy crude at the Gulf.
A new light sweet crude oil trading market is developing in Houston at the Magellan Midstream Partners East Houston terminal – delivery point for that company’s Longhorn and BridgeTex (50/50 owned with Plains All American) pipelines delivering crude from the Permian Basin. Light sweet crude from the Permian is also known as West Texas Intermediate (WTI) the domestic U.S. benchmark crude - widely traded at Cushing, OK where it underpins the CME NYMEX futures contract. Today we review the developing market and the price relationships that underpin it.
It seems logical to maintain stockpiles of critically important commodities like crude oil, heating oil and gasoline. After all, supply can be cut off suddenly by acts of God or man, causing price spikes, cold houses and empty gas tanks. Worries about supply interruption led to the creation of a federal Strategic Petroleum Reserve (SPR) and Northeast Home Heating Oil Reserve (NEHHOR) and, more recently, both federal and state reserves for motor fuels, again in the Northeast. But does the SPR as currently configured still make sense, given how much has changed in crude production and flows? Should we set up heating oil or motor fuel reserves in regions beyond the Northeast? And what about a strategic reserve for propane—an important fuel for millions of American homes and businesses? Today, we continue our look at the challenges of stockpiling hydrocarbons in a changing, unpredictable energy world.
At the end of last year the Department of Commerce Bureau of Industry and Security (BIS) issued clarifications designed to clear the way for greater U.S. exports of processed condensate. More companies have received BIS approvals to export – the latest being Plains All American last Thursday. Last year expectations were that as much as 230 Mb/d would be shipped in 2015. But narrowing price differentials have reduced the arbitrage necessary to make exports economic. Nevertheless midstream companies continue to invest in infrastructure to deliver processed condensate to marine docks. Today we review the state of the export market and ongoing infrastructure plans.
The combination of crashing crude prices and freight costs for long distance transport to refinery markets is tightening pressure on Bakken crude producer break-even economics. There is plenty of more expensive rail transportation capacity and not enough cheaper pipeline capacity to carry all production to market. For the moment producers appear to be sticking to favored markets on the East and West Coasts that can only be reached by rail. New pipeline capacity is two years away. Today we review the big shifts in North Dakota crude transport options.
With crude prices close to six year lows and the futures market pointing higher, a number of the larger commodities trading houses are buying and holding cheap crude in huge floating tankers for later sale. For the trade to work, prices today must be lower than they are in the future and the spread must cover the storage cost and other expenses. Players in the floating storage game have to be high rollers – the minimum cost of a bet at this table is ~$100 million. Today we complete a two-part series on contango-spread trades with a look at floating storage.
Many in the Northeast are digging out from what turned out to be a typical snowstorm – not a “Superstorm”. Thanks to worse crises in the past, however, a federal Northeast Home Heating Oil Reserve was set up in 2000 and--thanks to Superstorm Sandy--federal and New York gasoline strategic reserves were put in place much more recently. The winter propane crisis of 2013-14 also sparked talk of a possible strategic reserve for propane. The theory behind establishing these stockpiles is that in markets that depend heavily on steady, reliable flow of energy products it’s important to have a cushion, a squirreled-away supply to avoid the price spikes and near-panic that can follow the words, “Sorry folks, we’re all out.” Today we examine what’s been done, how it’s worked, and what might be next.
On Friday (January 23, 2015) West Texas Intermediate (WTI) futures prices closed under $46/Bbl for the second time this year. RBN’s analysis of producer internal rates of return (IRRs) for typical oil wells indicates that Bakken IRRs have fallen from 39% in the fall of 2014 to just 1% today. IRRs for typical Permian wells are down to 3% and typical Eagle Ford wells are at breakeven. Everything is underwater or close to it except for the sweet spot wells with higher production. Today we present highlights from RBN’s IRR and breakeven analysis – published in full today in our latest Drill Down Report.
Since the start of 2015, crashing crude prices have opened up a new opportunity for traders to profit while producers bite their nails. In today’s oversupplied market, prices for prompt delivery are lower than they are for further out months – a market condition known as contango. That’s when traders put on contango spread trades that involve buying and storing crude to sell at a higher price later. Rapidly rising crude inventories at Cushing (up 3MMBbl last week according to the Energy Information Administration - EIA) suggest it’s a popular strategy. Today we explain how the trade works at the Cushing, OK trading hub.