THE LOGISTICS OF CRUDE

Last week in Part 1 of this series, The Dynamics of Crude, we discussed refineries and products.  Now we move to Logistics of Crude Oil and Refinery Products.

Although Ayn Rand’s 1957 novel "Atlas Shrugged" portrayed rail as important, especially for Wyatt’s Refinery, rail was on its way out by the end of WWII.  Today’s major transportation methods are via pipeline and water (barge & ship).  The reason is quite simple: loading and receiving infrastructure.

Let us take a look at the famed Texoma Pipeline which was built to deliver crude oil from East Texas and Oklahoma to Sun Marine Terminal at Nederland, Texas, on the Neches River between Beaumont and Port Arthur.  From there crude oil went to nearby refineries in Beaumont & Port Arthur as well as to an adjacent small refinery owned by Sun Oil.  It was also loaded aboard tanker and shipped along the coast to the East Coast refineries on the Chesapeake Bay area and Newark, NJ.  This was well before WWII. 

Post-WWII, we began to place more emphasis on imported crude oil (price caps began on domestic crude during the Eisenhower Era).  Thus the Texoma pipeline was reversed and 4 tanker berths at the terminal got real busy taking in crude, mostly from the Middle East and North Africa, and pumping it inland to refineries located in Northeast Texas, Oklahoma and Southern Kansas. 

By the early 1980’s with crude oil sources becoming sour (containing sulfur), the metallurgy of these inland refineries was not suited and many of them were shuttered.  Dismantlement & demolition began in earnest by 1985 and most were gone by 1995.  The Texoma Pipeline was converted to natural gas transmission, as crude oil was not paying its way

The first major West to East pipelines were built during WWII.  This was to avoid German U Boats from stopping delivery to the East Coast.  They were known as the Big Inch and the Little Big Inch, a 24-inch diameter crude oil pipeline and its companion that carried refined products. 

Post WWII, US-flagged tankers (most were surplus from the war effort) were carrying products from refineries and chemical plants from the Gulf Coast to the East Coast where demand was heavier, and of course Florida where there was (and still is) no produced crude oil nor refineries.  The tankers were gradually replaced by pipelines which eventually reached as far north and east as the Washington DC area.  Below the Mason Dixon Line today, the only area not served by pipelines is the southern three-fourths of Florida.

Pipelines also reached inland and pumped crude oil from the Gulf Coast all the way up to Illinois and Indiana.

Here is a great description of both crude oil and refined product pipelines from 2001:  How Pipelines Make the Oil Market Work.

Why not railroads?

I have read lots of supposedly learned pundits wailing away how Warren Buffett and BNSF Railroad are going transport all that Canadian crude oil when Obama announced that he was blocking the Keystone XL’s construction.  This is impossibly dumb -so dumb that Jack Wheeler is convinced it isn’t dumb at all, that it’s a crony capitalist payoff to Buffett for his supporting Zero.  Buffett bought BNSF for $34 billion in 2009, counting on graft from Zero to provide his ROI.

Consider the shipping and receiving terminals required to ship 700,000 barrels of Canadian crude per day from Hardesty, Alberta to Corpus Christi, Sweeney, Port Arthur, Lake Charles, Norco and Chalmette (the towns in Texas and Louisiana which actually have refineries already configured to refine such a heavy grade of crude oil), plus the small Lyondell refinery in Houston. 

The largest tank cars today have a capacity of around 600 barrels of crude.  So you’ll need over 1,000 tank cars per day. The rail route would be a 10 day trip one way, meaning over 10,000 loaded tank cars in transit daily.  Those tank cars don’t already exist.  It also means that 10,000 returning empty tank cars are in transit daily.  Then you have tank cars waiting to be loaded at rail terminals which also do not exist, and unloaded at tank car racks at refineries. These racks do not exist either.

The largest refinery in the US is the newly expanded Motiva Refinery at Port Arthur, with a 600,000 barrels-per-day refining capacity.  The average cargo of crude oil aboard crude oil tanker arrives at the Motiva dock with 400,000 barrels of product.  It takes 24 to 28 hours from docking to setting sail. 

Why in the world would a refinery want all the hassle with an equivalent of over 600 tank cars, and pay for the hassle in more freight costs?  If I own that refinery, I’m buying from Venezuela, or from Eagle Ford right next door.  It simply makes absolutely no economic sense to use rail. 

Regarding transportation, Ayn Rand was years behind her time.  So is Warren Buffett. After the Romney Landslide on November 6, those fortunate enough to own Berkshire Hathaway stock might consider cashing out.

The New Dynamic

Much space has been given to Keystone XL and its planned capacity to carry 800,000 barrels per day from Hardesty, Alberta to Nederland, TX (see aforementioned Sun Marine Terminal) made up of batches of Canadian Blend (mixture of reconstituted Syncrude & produced very heavy crude) at the average rate of 700,000 barrels per day, plus Bakken Crude from North Dakota at the average rate of 100,000 barrels per day.

A lot of fear has been written about running a pipeline from Alberta to the Vancouver Area to ship crude to China.  This is not new as one was planned in 2006 and cancelled in 2007 when China backed out of the deal due to the slow permitting process.  Anyone like me thinks that the Bush Administration had a hand in this cancellation?  

Here is info on that proposed Gateway Pipeline, which is back on again with the permitting process as of 2010 after the Obama Administration took the reins.  There is also a proposed pipeline by Kinder Morgan’s Canadian subsidiary over a similar route.

The town of Cushing, Oklahoma proudly bills itself as "The pipeline crossroads of the world."  Imported crude would be sent to the Cushing storage hub to be pipelined all over the US.  A historic reversal of pipeline flow is now taking place.  So much domestic crude from US fields is flowing into Cushing that a lot of it is reverse flowing to Gulf refineries.

A completed reversal which has been already completed is the Seaway Pipeline from Cushing to Freeport, TX where the crude would be distributed across the Gulf Coast through the existing pipeline system from Corpus Christi, TX to Saraland (Mobile), AL.  First oil left Cushing on May 19^th of this year at the rate of 150,000 barrels per day and by early 2013 that rate will increase to 400,000 barrels per day.

The giant Capline System is contemplating reversal of 1.2 million barrels per day capacity, operated by Shell but with several major stakeholders such as Shell, BP & Marathon.   It was built to supply crude oil from the Gulf of Mexico & imported crude at LOOP (Louisiana Offshore Oil Port) the only supertanker port  in the Continental US all the way up to Michigan and Indiana.

Now there is such a "glut" of US produced crude, Capline may soon be reversing its pipeline flow as well.

What does the changing dynamic mean?

Less reliance on crude oil from Venezuela (replaced by Canadian Blend), West Africa, North Sea & Middle East (replaced by Bakken).  This is especially true since the obsolete refineries on the East Coast are almost all facing shutdown, with one already being dismantled.

Additionally, the former Hess Refinery (at one time the world’s largest at 650,000 barrels per day) in St.Croix, US Virgin Islands, has closed permanently. While the closure last January has been blamed on the EPA, the new refining capacity coming online in the last 2 years along the Gulf Coast and less expensive pipeline transport of products to the East Coast had made it obsolete.

One last note. A significant amount of US refining capacity is being freed up to produce more gasoline, diesel and kerosene (jet fuel).  A lot of capacity was needed to supply olefins (ethylene) with naptha feedstock, but no longer – thanks to the abundant and inexpensive supply of natural gas liquids separated from wet gas produced by the new shale plays, and the trillions of cubic feet discovered and being produced off the coast of Louisiana.

The new dynamic is well underway.

Kermit Hoffpauir – "Citizen K" on the TTP Forum – has been involved in marketing and sales of surplus refining, chemical, plastics process equipment and units for 25 years.  He is currently working with the liquidation of one the recently closed major Philadelphia area refineries, as well as finalizing the sale of a simple small inland refinery to be dismantled and shipped overseas.  He is president of K Energy Equipment, GM of C. A. Cooper Properties (both based in Baton Rouge) and JV partner in PXK (based in Houston).