East Coast refiners eye Texas oil as
North Dakota alternative
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[April 25, 2017]
By Catherine Ngai and Jarrett Renshaw
NEW YORK (Reuters) - U.S. East Coast
refiners are looking to buy increasing volumes of domestic crude oil
from the Gulf Coast, two sources said, the latest twist in a trade flow
upheaval in the wake of the opening of the Dakota Access pipeline.
Major U.S. East Coast refiners profited from railing hundreds of
thousands of barrels of discounted Bakken crude to their plants daily
from 2013 until 2015. But as more and more pipelines were built in North
Dakota, the discount began to disappear, and so did the rail cars.
Now, at least two East Coast refiners, Phillips 66 <PSX.N> and Delta Air
Lines Inc's <DAL.N> subsidiary Monroe Energy, are looking to move more
crude by ship from Texas into the Philadelphia area. The Dakota Access
pipeline starts up in May, giving the Gulf access to the Bakken shale
play, and will likely sap any lingering economic incentive for
Bakken-by-rail, which is more expensive.
This option is more expensive than oil imported to the East Coast,
typically from Nigeria. Analysts and traders expected that once the
Dakota line came into service, East Coast and West Coast refiners would
rely on foreign barrels.
In 2016, 13 million barrels of crude went from the U.S. Gulf to the East
Coast, according to the U.S. Energy Information Administration. By
comparison, the East Coast took in 323 million barrels of imported crude
Shipping sources say that costs could range between $2.60 to $3.50 a
barrel for the two-week round trip on a U.S. flagged vessel. That is
lower than the peak, brokers said, because a number of spare vessels are
available. Taking a cargo of Nigerian Bonny Light to Philadelphia costs
about $1.40 a barrel, brokers said.
Brokers interviewed said bringing U.S. oil via tanker to the East Coast
gives refiners access to a variety of crude grades available in Texas,
where most U.S. oil ends up now.
"It's about optimizing assets. From Texas, you could bring up Eagle
Ford, Permian or even Bakken crude," said one source.
That journey could guarantee a steady supply of domestic crude, as both
Phillips 66 and Monroe Energy already have U.S.-flagged Jones Act
tankers contracted, brokers said, so bringing that crude would not be
difficult. Phillips 66 and other refiners use their tankers to shuffle
products to higher margin regions or to bring crude to their refineries.
[to top of second column]
Construction equipment sits near a Dakota Access Pipeline
construction site off County Road 135 near the town of Cannon Ball,
North Dakota, U.S. on October 30, 2016. REUTERS/Josh Morgan/File
Even with added Gulf shipments to the East Coast, refiners there
should still receive the bulk of their supply from foreign sources
due to economics, said Sandy Fielden, director of oil and products
research for Morningstar.
West Africa produces crude that is "gasoline rich," he said,
important for East Coast refiners. He said he doubts sending Jones
Act tankers makes a lot of sense financially because the spread
between global benchmark Brent <LCOc1> and U.S. West Texas crude
<CLc1> futures is not enough to justify the shift.
In an earnings call last year, Phillips 66 President Tim Taylor said
the combination of the Dakota pipeline and water could potentially
supply the 285,000 barrel per day Bayway refinery in Linden, New
Moving crude by water from the Gulf up the Eastern Seaboard is not
unheard of. Since October, NARL Refining LP has booked at least
seven cargoes from Texas ports to its 130,000 bpd Come-By-Chance
refinery in Newfoundland, in eastern Canada. In the previous 10
months, NARL booked just four Texas cargoes, according to Reuters
Eikon shipping data.
(Additional reporting by Liz Hampton in Houston; Editing by
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