National Post (Latest Edition)

Bottleneck­s threaten to throttle U.S. shale surge

From pipelines to ports to storage facilities

- Alex NussbAum

NEW YORK • The U.S. shale surge is crashing headlong into a barrage of bottleneck­s.

From West Texas pipelines to Oklahoma storage centres and Gulf Coast export terminals, the delivery system for American crude is straining to keep up with soaring production. That’s limiting the industry’s ability to take full advantage of growing worldwide demand, with U.S. barrels forced to take a US$9-a-barrel price discount to internatio­nal crude.

Barclays PLC analysts this week predicted “a new shock” for energy markets as a dearth of pipeline capacity near a key Oklahoma storage hub threatens the flow of oil. Pipeline shortages in Texas’s Permian basin, meanwhile, may not clear until late 2019. The problems undercut hopes American output will stabilize global prices as crude from Venezuela and Iran is increasing­ly at risk.

“When you’re forced to truck barrels about 500 miles to the Gulf Coast — yes, that’s as inefficien­t as it sounds — the price differenti­al ‘blows out’ to levels seen recently,” Raymond James & Associates analysts wrote in a note this week.

To account for higher shipping costs, crude sold from Midland, Tex., the Permian’s unofficial capital, sold for US$19 a barrel below Gulf Coast prices this past week, according to data tracked by Bloomberg.

Permian production is set to be “materially above” local refining and transporta­tion capacity for the next 12 to 18 months, the Raymond James analysts, led by Darren Horowitz, said in their note.

Pipelines aren’t the only problem. The U.S. currently has only one export terminal that can accommodat­e the 2-million-barrel supertanke­rs preferred by Asian and European customers, and expansions at other ports aren’t expected to be complete before 2020, according to Sandy Fielden, director of oil research at Chicagobas­ed Morningsta­r Inc.

Exports have only been a major concern for the U.S. oil industry since late 2015, when the government ended a 40-year ban on overseas shipments, and they’ve only been economical­ly viable for the last 18 months or so, Fielden said in a note to clients. “It wasn’t even on the map in 2015,” he added. “It’s been a scramble to get organized.”

The rising cost of transporti­ng oil from Permian wells in West Texas and New Mexico could slow the breakneck pace of growth until early 2019, analysts at Houston investment bank Tudor Pickering Holt & Co. wrote in another note. Natural gas shipments also face constraint­s, they said. The “wall likely hits at a similar time to crude and could prove an equal barrier to growth,” the analysts wrote.

Enticed by a rebound in global oil prices, U.S. producers set a record this month, pumping 10.7 million barrels of oil a day. American crude exports climbed to a record 2.57 million barrels a day in the second week of May, according to the U.S. Energy Department.

But the surge in output has laid bare the limitation­s of a system that evolved over the last half-century to move foreign oil into the U.S., not the other way around.

In the Permian, the problem’s been magnified by a tight labour market for drivers and competitio­n for trucks that are also needed to deliver sand and chemicals for hydraulic fracturing, according to the Raymond James analysts.

Further down the supply chain, the “next bottleneck” looks likely to develop around the crude supply and distributi­on hub in Cushing, Okla., Barclays said. Inventorie­s continue to grow there due to “insufficie­nt take-away capacity,” analyst Paul Cheng said in a note to clients. Rising output from the Bakken shale play in North Dakota will add to the pressure in coming months, Cheng said.

Meanwhile, exporters along the Gulf Coast are scrambling. The region’s key shipping hubs — Corpus Christi, Houston and Beaumont in Texas, and St. James in Louisiana — plan to add at least 54 million barrels of storage capacity starting next year, a 25-per-cent increase, Fielden said in his report. Nine projects will expand docks at 40 separate marine terminals.

For now, only the Louisiana Offshore Oil Port, or LOOP, can accommodat­e a fully laden Very Large Crude Carrier, one of the 2-millionbar­rel tankers that offer the most efficient shipping to customers. Corpus Christi has announced plans for its first onshore VLCC dock, with another planned near Brownsvill­e, Tex., but neither is scheduled to be finished until 2020 at the earliest, Fielden said.

Until then, the ports must use smaller tankers or take the time-consuming process of filling VLCCs offshore.

Fielden estimates the Gulf Coast can currently export about 3.8 million barrels a day. That’s well above current levels, but partly because bottleneck­s back in the Permian and Cushing are limiting supplies, he said in a telephone interview.

“In a year’s time, we’re going to have a bunch of new pipelines and all of that capacity is heading straight for the export docks,” Fielden said. “Next year’s when we’ll see the real potential constraint­s if we don’t build those out.”

 ?? OCCIDENTAL PETROLEUM VIA THE NEW YORK TIMES ?? Shale oil from the Permian Basin in Texas, above, is running into a shortage of pipeline capacity that is causing a big discount from Gulf Coast prices.
OCCIDENTAL PETROLEUM VIA THE NEW YORK TIMES Shale oil from the Permian Basin in Texas, above, is running into a shortage of pipeline capacity that is causing a big discount from Gulf Coast prices.

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