Sandy Fielden, RBN Energy
The Ho-Ho reversal project coming online in early 2013 provides an important link between the Texas and Louisiana Gulf Coast markets. Ho-Ho should help to distribute 3 MMb/d of crude supplies arriving over the next two years in the Houston area to refineries throughout the region. All this new pipeline capacity is designed to end the Midwest supply glut. Today we discover how the new supply capacity could initially cause more problems than it solves.
In Part 1 we detailed Shell’s planned early 2013 completion of the eastbound Houston, TX to Houma, LA (Ho-Ho) pipeline reversal. The Ho-Ho reversal will provide a link for new flows of crude arriving at the Texas Gulf Coast via pipeline projects due in service during 2013 and 2014 to flow to the Louisiana Gulf Coast. Bakken and Canadian Crude via Cushing, Eagle Ford crude from South Texas and Permian Basin crude from West Texas will be able to reach the entire 7 MMb/d Gulf Coast refining complex (download PDF). Shell is also planning to replace the reversed westbound Ho-Ho link with a new Westward Ho pipeline from St James LA back to Houston in 2015.
The Ho-Ho reversal completes a new crude logistics paradigm in the US. Under the old paradigm the needs of Gulf Coast refineries that exceeded local onshore and offshore Gulf of Mexico production were met by imported foreign crude. A portion of that imported crude also flowed from the Gulf Coast to the Midwest when refinery capacity in that region exceeded domestic and Canadian supplies. In the new paradigm, from early 2013 incremental crude supplies to feed Gulf Coast refineries will come from domestic production and Canadian imports rather than from foreign imports into the Gulf Coast. The pipeline projects to facilitate this new paradigm are already well underway but will really kick into gear over the next two years. The table below shows the projects together with their capacities and expected online service dates.
|Pipeline||Capacity Mb/d||Service date||Route|
|XOM Pegasus||96||Existing||Patoka to Nederland|
|Seaway 1||150||2012||Cushing to Houston|
|Seaway 2||250||2013||Cushing to Houston|
|Seaway 3||450||2014||Cushing to Houston|
|Keystone Gulf ext||700||2013||Cushing to Nederland|
|Keystone Hou Lateral||130||2014||Cushing to Houston|
|Eagle Ford Enterprise||350||2012||Leissy to Katy|
|West TX Gulf||40||2012||Midland to Nederland|
|West TX Gulf||90||2013||Midland to Houston|
|Permian Express 1||90||2013||Colorado City to Nederland|
|Permian Express 2||110||2014||Colorado City to Nederland|
|Longhorn Reversal||225||2013||Crane to Houston|
|Bridge Tex||278||2015||Colorado City to Texas City|
|KM Crude/Condensate||300||2012||East Eagle Ford to Houston|
|Total new capacity: 2012-2015||3113|
Already in 2012 we have seen new pipeline capacity opening up from Cushing to Houston on the Seaway pipeline (150 Mb/d) and from south Texas to Houston via the Eagle Ford Enterprise (350 Mb/d) and Kinder Morgan Crude Condensate (300 Mb/d) projects. In addition the first West Texas Gulf pipeline extensions (80 Mb/d) opened up a direct route from the Permian Basin to Houston. In 2013 the Seaway pipeline will be expanded (250 Mb/d), the Keystone Gulf Extension brings crude from Canada and the Bakken (700 Mb/d) and the Permian Express (90 Mb/d) and Longhorn reversal (225 Mb/d in two increments) bring more crude from West Texas to Houston. In 2014 the Seaway pipeline will add a parallel line to more than double capacity (450 Mb/d), the Houston Lateral will add to Keystone capacity (130 Mb/d) and the Permian Express Stage 2 will add more capacity from West Texas (110 Mb/d). The only 2015 project proposed so far is the Bridge Tex pipeline adding another 278 Mb/d from the Permian basin to Houston. Here’s a summary of these additions:
2012 (actual) 0.8 MMb/d.
2013 1.3 MMb/d.
2014 0.7 MMb/d
2015 (proposed) 0.3 MMb/d
Total 3.1 MMb/d
In short these projects add up to a whopping 3.1 MMb/d of new crude capacity into the Houston area by 2015. Without the Ho-Ho reversal all of these crude supplies will be piling up in Houston to meet demand restricted to local Texas Gulf Coast refinery capacity. Although Texas Gulf Coast refineries (3.8 MMb/d) could absorb the new crude it is unlikely that they will abandon their existing suppliers overnight. We have previously covered the crude quality issues that will make it hard for Gulf Coast refiners to simply switch their supplies on a dime (see Turner Mason and the Goblet of Light and Heavy). Instead refiners will gradually replace existing imports, perhaps initially by blending them with the newer lighter crudes. That means the new crude supplies coming into Houston could start to backup pretty quickly – resulting in a new supply logjam on the Texas Gulf Coast.
To prevent that happening, the Ho-Ho reversal - in theory at least - provides a gateway for the new Houston bound supplies to reach an additional 3.2 MMb/d of refining capacity on the Louisiana Gulf Coast. However Ho-Ho only has capacity to move 250 - 360 Mb/d (depending on the route). As a result, although Ho-Ho provides a critical link to reduce crude congestion in the Houston area it does not have sufficient capacity to disperse all the crude that needs to flow East from Texas to Louisiana in order to prevent oversupply in Houston.
A potentially more flexible relief valve for crude trying to reach the Louisiana Gulf Coast from Texas will be additional rail tank car movement. Such movements from the Eagle Ford and Permian basins direct to St James, LA or Louisiana area refineries are already taking place and they could increase. Just as we saw in Cushing over the past two years, the build up of a crude stockpile in Houston will discount prices there versus the Louisiana Gulf Coast enough to make the higher cost of rail car movements economic.
Another outlet valve to help crude supplies from Texas reach the Louisiana Gulf is waterborne movement. There are already three tankers moving Eagle Ford crude from Corpus Christi, TX to LOOP LA. Those tanker movements are restricted because they are between US ports and have to use Jones Act vessels (see The Sea and Mr. Jones). They are however being encouraged by the LOOP port authority that has constructed offloading facilities that suit the smaller tankers being used for these coastal waterborne movements.
While we can look at the Houston supply position based on all the new incoming capacity and easily predict a traffic jam, the Louisiana Gulf Coast situation is harder to interpret. The signs are that there will be oversupply problems in Louisiana as well. The Ho-Ho reversal effectively blocks 360 Mb/d of crude oil that was previously being transported from Houma in Louisiana back to Houston. That capacity was being fully used until recently (Shell has started to shut down the westbound Ho-Ho as part of the reversal process). The Shell Westward Ho project is designed to reopen that westbound flow in 2015. In the meantime, as 360 Mb/d starts to flow on Ho-Ho eastbound in 2013, the Louisiana refining market will suddenly have to absorb 720 Mb/d of supplies that were not previously available (360 Mb/d from Houston and 360 Mb/d that can no longer go west on Ho-Ho). That is in addition to supplies reaching the Louisiana Gulf Coast by rail and tanker that we mentioned a minute ago. The likely outcome is that foreign imports into Louisiana will be backed out - but not before the supply glut puts downward pressure on crude prices to deter those imports.
The 1.2 MMb/d Capline pipeline from St James, LA to Patoka, IL in the Midwest is a potential relieve valve that could prevent the build up of crude supplies in Louisiana by sending crude north to the Midwest market. However, Capline utilization is currently at historically low levels (see Dragging the Capline) and Midwest refiners already have ample crude supplies from North Dakota and Canada. Indeed there is a pipeline project on the drawing board that amounts to a reversal of the current Capline flow. That is the proposed Trunkline repurpose project (Energy Logistics). The Trunkline repurpose plan is to convert an existing natural gas pipeline to bring 400 - 600 Mb/d of crude to St James, LA from Patoka, IL. If the project goes ahead it will be completed at the end of 2014 – bringing yet more crude into the Louisiana refinery market.
Once the Westward Ho project is completed in 2015 then crude flows from Louisiana to Texas will be restored and the new pipeline is expected to move increased Gulf of Mexico offshore production. Whether those additional supplies will be welcome in Houston is another matter but they will at least relieve the Louisiana market.
For now, the Ho-Ho reversal looks - on paper at least to be a logical missing link between the Texas and Louisiana refining markets - required to complete the shift to a new US crude oil logistics paradigm. However when you add up the new crude flows coming to the Gulf Coast, the Ho-Ho project does not provide enough capacity to prevent an oversupply problem in Houston. The arrival of 3.1 MMb/d of new crude supplies into the Texas and Louisiana refining markets over the next two years is shaping up to be quite chaotic. The Ho-Ho reversal may also compound the problems by creating a separate supply build up in Louisiana. In the final installment in this series we will project the overall PADD 3 supply/demand picture out to the end of 2014 and ask who the winners and losers will be as this tremendous supply transition takes place.
About the author
Sandy Fielden serves as Director Energy Analytics for RBN Energy LLC and is an internationally accomplished professional with 25 years of management and communication experience in the European and North American energy industry, including ten years as a vice president at industry leading firms. He is a widely recognized expert at analyzing, processing, and communicating the value of a wide range of information in the energy industry.