North American oil production is on the rise and it is causing some logistics headaches. Much of the new output is from unconventional sources and remote locations. Bringing the new oil to the continent’s major refining centres, including the US Gulf Coast, is requiring the laying of new pipelines, the reversal of flows through several existing pipeline links, the construction of large inland oil depots and the manufacture of thousands of rail   tank cars.
All these requirements come with challenges. There are others. Much of the new “tight oil” from unconventional sources, including oil shale plays, is concentrated in the upper Great Plains, well away from most refineries. Quite apart from the problem of transporting the oil, Gulf Coast refineries have invested heavily in gearing up to process heavy and sour imported crudes and will not be able to take all the new domestic crude coming on stream.
Meanwhile, the simpler East and West Coast plants are more configured to process the lighter, sweeter crudes of the type being extracted from tight oil formations. However, delivering the new oil over long distances eastbound and westbound poses difficulties due to the limited pipeline capacity available.
On a commercial level, the new sweet crudes being produced in remote parts of the continent would command a premium if they were readily accessible to the world market. Unfortunately, the current value of these new crudes is more a reflection of the comparatively low North American market price. Ironically, that price, the West Texas Intermediate (WTI) posting, remains under pressure as oil production across the continent surges.
Some domestic oil producers are eschewing the communal approach and seeking their own logistics solutions. They are developing the means, in-house, to get their tight oil to US Gulf storage terminals in order to export it and achieve a better price for their output. Latin American refiners are a target market for these shipments.
The flow south of Great Plains oil will include the rising output of crude from Albertan oil sands. The US is the market of choice for all the oil coming out of Canada’s mid-western provinces and the new oil sands volumes will put additional pressure on not only pipeline capacity but also the processing capabilities of US Gulf Coast refineries.
Aside from domestic production and delivery issues, the new North American oil logistics infrastructure that is emerging will have repercussions for the global oil tanker market and the pattern of refined products distribution operations in the region.
Oil production in the US and Canada is forecast to grow by about 35%, or more than 3 million barrels per day (bpd) over the coming five years, topping the 12 million bpd mark by end-2016. Such an output will exceed the continent’s previous record high production level of 11.2 million bpd set in 1973.
Pipelines will play a key transmission role in directing the new Great Plains oil volumes southwards and the tight oil arriving on the Gulf Coast that cannot be processed by local refineries will be exported. This marks an important reversal in flows as for the past three decades most oil has been pumped northbound from the Gulf following processing by the region’s import refineries.
Although Canadian oil output is poised to make an important contribution to the new southbound flows, the logistics challenges start close to source. There are currently six major US-Canada pipeline systems but five of these are either full or constrained. New pipelines will be required.
The development of new US oil pipelines to carry these Great Plains southbound flows is lagging behind drilling and production efforts for a number of reasons. Not least of these are the time needed to design, permit and build new capacity and the requirement that oil pipeline developers obtain rights-of-way in each state to be transited. Achieving the necessary permissions for lines through densely populated states is particularly difficult. The wide scattering of well locations is another factor as is the fact that most existing pipe transmission systems are designed for lower volumes than those anticipated.
The permitting problems associated with the planned construction of the Keystone XL pipeline, to bring the output from both Alberta’s oil sands projects and the Bakken field, which is centred in North Dakota, to the US Gulf, is a case in point. Over 10,000 pages of environmental review have already been completed for Keystone XL and a US Presidential Permit has been applied for but the political issues are complex and the decision-making process slow. Keystone XL is yet to be cleared for take-off.
Exporting Canadian oil from the US Gulf by means of the Keystone link would have its advantages, not least because such shipments do not require all the clearances that exports of US oil would have to comply with. The opening of the Panama Canal’s new, enlarged lock system in 2014 would enable the consolidation of Canadian oil consignments in US Gulf storage terminals for shipment to energy-hungry Asian markets in new Panamax-size tankers.
Although rail will play a secondary role to pipelines in the new North American oil logistics scenario, it will nevertheless be a role of some importance in the drive to overcome pipeline bottlenecks. Developers of the Bakken field’s rich resources are examining every conceivable way of getting their tight oil output to market. New storage depots and railheads are being constructed at several locations to exploit the rail option. Shippers of bitumen point out that rail car consignments require one-third less diluent than bitumen pumped through pipelines.
Rail shipments westbound from the Great Plains are likely to be a feature because the US West Coast is an isolated coastal market with few pipeline links to the rest of the country. Bakken crude is already moving to the state of Washington in rail tank cars and plans to move several unit trains per week to California are materialising.
One energy major has recently leased 1,000 rail tank cars for its North American oil operations while another despatched its first rail shipment, a 120-car train, from its new, open-access crude oil marketing terminal in North Dakota. The oil is first marshalled at the terminal by means of road tankers and short pipeline links to the wellheads.
In another recent rail delivery of Bakken tight oil laden tank cars were directed East 2,200 km to Albany, New York where the crude was transferred to barges and transported to a Philadelphia-area refinery.
The extent to which tight oil penetrates the eastern US market is being watched with interest. The US East Coast has traditionally been an import market. In 2011 93% of the region’s supply of crude oil and refined products was shipped in by tanker.
As of mid-2012 approximately 100 infrastructure projects aimed at bringing new sources of US and Canadian tight oil to market had been tabled. Approximately three-quarters of the total involve pipeline newbuild and expansion initiatives but there are also 13 rail and 12 refinery expansion projects under development.
The North American oil industry is about to enter a new era and logistics will need to play a major role if the full potential of the new-found hydrocarbon resources is to be realised. US and Canadian producers have already achieved a good head start over their overseas rivals in the development of shale oil, oil sands and other sources of tight oil.
The oil industry has a knack of overcoming logistics challenges and there is no reason to doubt that they will not once again succeed in putting the necessary infrastructure in place in the wide open spaces of the Great Plains and along the shorelines of Texas and Louisiana.
Source: BIMCO