New pipelines are coming online to deliver increasing volumes of US and Canadian production to market. Producers want to be paid full value for the quality of the crude that leaves their wellhead. Yet many pipelines blend different shippers’ crude into a common stream. To compensate for any loss of value en route, pipelines operate quality banks. These systems calculate payments or debits for each shipper based on their input crude quality versus the common stream. Today we look at crude quality banks that determine value using refined products.
In the first episode in this series (see You Can’t Always Get What You Want – Crude Oil Pipeline Quality Banks) we ran through crude quality challenges associated with pipeline transportation. Even though crude can be separated into batches on pipelines, that solution is not as efficient as sending everything in a common stream. But common stream systems blend all shippers’ crude together meaning that what a shipper takes out at the end of the pipe is different to what they put in. We described a quality bank approach whereby pipeline operators calculate debit or credit charges to equalize crude quality based on crude valuation. This time we look at a second approach to quality bank calculations referencing the value of the refined products components of different crudes.
Recall from last time that the crude valuation approach calculates a price for crude qualities such as API gravity and sulfur content that can then be applied to the difference in these qualities between the crude each pipeline shipper injects and the value of the common stream crude that they take out. That crude valuation approach is pretty complicated – with twelve variables going into the final calculation. But the refined product approach we look at today ups the ante and adds even more variables. The example we will use to describe this approach is for the Trans Alaska Pipeline System (TAPS) that runs 800 miles from the oil production region in the north of Alaska down to the Pacific Coast at Valdez, AK (see After the Oil Rush). The pipeline blends all producer’s crude into one stream – that is sold as Alaska North Slope (ANS) crude.
And before we get into the nitty gritty if anyone thinks that oil pipeline quality banks are just operational nickel and diming then be aware that Anadarko just won a $9 MM Federal Court judgment for monies owed them by Williams Alaska – resolving a quality bank payment issue dating back to 2000. That’s a lot of nickels and dimes.
Instead of just using a couple of crude quality characteristics (gravity and sulfur) like the CHOPS example we looked at in Part 1, the TAPS quality bank uses crude assay analysis to identify each component of the crude. Crude assays are lab tests that determine the quality characteristics of each component of a particular crude. Assays identify the crude components after distillation and are a precursor to refinery yields that identify actual refined product volumes (see Refinery Yields Forever). Among other tests, the assay identifies the volume and API gravity of each component for given true boiling point (TBP) ranges (see table below – values are determined for each “X”). The TAPS quality bank then uses market valuations for each component of the crude identified in the assay to calculate the debits or credits applied to that crude versus the common stream. These adjustments are calculated for each production crude stream entering the pipeline – comparing the inlet stream to the common stream immediately downstream of the inlet connection to determine appropriate credits or debits to each producer.
TAPS Crude Assay Data for the Quality Bank
Source: ExxonMobil Pipeline Company Tariff (Click to Enlarge)
The next part of the TAPS quality bank calculation places dollar values against each of the components listed in the table. This is done by using market prices for refined products at two destination markets – California and the US Gulf Coast. The idea behind using two markets is that the crude valuation used for the quality bank should reflect where the ANS crude is headed. In fact nowadays all ANS crude goes to the West Coast so the Gulf Coast values are not needed for the calculation – making it simpler (thank goodness). In the good old days when they shipped ANS to Houston through the Trans Panama Canal (see The Crude From TransPanama) the number of calculations would have been double.
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