Crude Oil Glut at Cushing May Worsen as New Production Outstrips New Outbound Pipeline Capacity

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The crude oil imbalance at the Cushing, Oklahoma, hub is likely to get worse before it gets better, and ultimate relief is several years away, speakers told a Rocky Mountain oil and gas conference in Denver last week.

The Cushing hub currently receives about 1.6 million barrels per day (BBL/d) of oil, but outbound pipeline capacity is limited to about 1.3 million BBL/d, according to Paul Miller, senior vice president of oil pipelines at TransCanada PipeLines Limited, a unit of TransCanada Corporation (NYSE:TRP) (Calgary, Alberta). The imbalance at the hub creates a situation that is "bad and getting worse," he added, because new production is coming online faster than pipelines and infrastructure are being completed.

High crude oil prices incent producers to maximize production, which has created a $20 to $30 per barrel price penalty for crude oil destined for Cushing vis-à-vis Louisiana Light & Sweet (LLS) or Brent crudes. High storage levels at Cushing coupled with a warm weather and relatively weak domestic demand for refined petroleum products also play into the Cushing price penalty.

"People are trying to avoid Cushing," Miller told the 6th Annual Rockies Oil & Gas Conference, sponsored by Platts. Miller and other speakers agreed that crude oil production will rise by up to 2.2 million BBL/d between 2011 and 2016 in the mid-section of the U.S. and Canada, including the Eagle Ford, Permian, Niobrara and Bakken formations.

A series of refinery conversions under way in the Midwest is expected to make a difficult situation even worse, the TransCanada executive said. Three refineries totaling about 500,000 BBL/d of processing capacity are being altered to process heavy crude. These refineries--Whiting, Detroit and Wood River--had processed light crudes.

"Something's got to give," Miller told about 350 attendees at the conference. He predicted that the Cushing price penalty will increase in 2012. "It will be Q1 2013 before producers see any relief (from the Cushing bottleneck), but even then it will be short-lived," as expected production gains will once again outstrip planned pipeline and infrastructure additions.

Crude-oil production in the Bakken formation is expected to double to about 1.2 million BBl/d by 2016. Several planned crude oil pipelines will be built in the coming years to carry that crude out of the Bakken and into Cushing, potentially causing further bottlenecks there, speakers told conference attendees.

Last week, ONEOK Partners LP (NYSE:OKS) (Tulsa, Oklahoma) proposed building a 1,300-mile crude oil pipeline from the Bakken formation in North Dakota to Cushing. The Bakken Crude Oil Express Pipeline could transport up to 200,000 BBL/d of crude oil when it begins operating in early 2015. The company said construction is scheduled to begin in late 2013.

The planned conversion of the Pony Express Line from natural gas to crude oil will bring up to 220,000 BBL/d of crude oil to the Cushing hub from the Bakken, Denver Julesburg and Niobrara formations, Bob Mishler, an executive at Kinder Morgan Energy Partners LP (NYSE:KMP) (Houston, Texas) told the conference attendees. He said the project expects to file its gas-to-oil conversion paperwork with the Federal Energy Regulatory Commission (FERC) (Washington, D.C.) in mid-2012, and it could take about one year to receive a permit. Conversion-related work could begin in mid-2013, and the pipeline could be transporting crude oil by late-2014, he projected.

But Cushing's crude oil glut could be alleviated by several pipeline projects that will carry crude oil from that hub to the Texas Gulf Coast. Following the Obama administration's rejection of a permit for TransCanada's Keystone XL crude-oil pipeline, TransCanada split off the Cushing-to-Gulf Coast portion of that project, renamed the segment the Gulf Coast Project, and set about securing regulatory approvals for the $2.3 billion, 535-mile project. The Gulf Coast Project will be able to transport up to 500,000 BBL/d of crude oil out of Cushing. Miller said if the project receive its permit "soon," as it expects, it could be operating by mid-2013.

Two other crude-oil pipelines could further alleviate the bottleneck in Cushing by adding outbound capacity to Texas. Units of Enbridge Incorporated (NYSE:ENB) (Calgary) and Enterprise Products Partners LP (NYSE:EPD) (Houston) are reversing the flow of their Seaway crude oil pipeline, making it run from Cushing to Port Arthur, Texas. That reversal, scheduled to come online during the current quarter, can take up to about 150,000 BBL/d of crude oil out of the Cushing hub, Brad Shamla, a vice president for market development at Enbridge Pipelines, told the conference. A second pipeline project, Seaway's Twinning, could add another 450,000 BBL/d of capacity from Cushing to Port Arthur when it begins operating in mid-2014, he added.

Reviewing various forecasts for rising crude oil production from the U.S. MidContinent, Rusty Braziel, president of RBN Energy (Houston), said crude-oil production growth is expected to be "big, or really big, or really, really big." Usually, that's a good problem to have. But not always--just ask the crude-oil producers whose product sits in Cushing, Oklahoma, awaiting transport to refineries.

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