When U.S. crude oil exports earlier this year hit a record high of 3 million bpd, there was much joy and back-slapping, but amid this joy a few problems have reared their ugly heads, notably pipeline capacity shortages, and perhaps worse, export terminal capacity shortages.
There is only one port on the U.S. Gulf Coast that has the capability to load very large crude carriers that can ship as much as 2 million bpd of crude. This is the offshore oil port of Louisiana, and as the Wall Street Journal’s Rebecca Elliot noted in a recent story on the shortage topic, it is mostly used for imports.
With production in the Permian booming, producers, traders, and investors are growing increasingly eager to make more export terminals. Reuters reported this week the Carlyle Group had teamed up with the port authority of Corpus Christi in Texas to build what the company says will be the first onshore export terminal capable of loading VLCCs.
Trafigura and a couple of pipeline builders and operators are also planning terminals in Texas and Louisiana to take the influx of new supply from the shale patch, but whether they will actually be built remains uncertain. There is a complex regulatory approval process that can delay the projects, potentially compromising their profitability. As Elliot notes, there are analysts who doubt the long-term demand prospects of all these export terminals, and with each of them costing upwards of a billion dollars, the rush to build them as soon as possible is understandable. Related: World’s Cheapest Natural Gas Market Could Be Facing A Shortage
There is one more reason to rush. The Permian producers are selling their oil at a considerable discount to the West Texas Intermediate benchmark because there are not enough pipelines to carry it more cheaply to refiners. Yet several are coming online in the next couple of years, and will add around 3 million bpd to existing capacity, which stands at 3.1 million barrels daily. These pipelines will need terminals to connect to.
On the other hand, the rush might be premature. Reuters quotes Wood Mackenzie analyst John Coleman as saying, “Everyone is racing to throw their hat in the ring and get their project done before everyone else. There’s simply not enough oil volumes to go around.”
Indeed, while upbeat estimates of future exports see them rising to as much as 4 to 5 million bpd, the capacity of all the export terminals being planned right now is more than this. In other words, there will not be a need for all of them, so those that manage to build theirs first will be the winners, securing long-term demand.
However, this won’t solve another problem: congestion. The Louisiana offshore oil port is already pretty busy, and higher exports won’t help matters. The same is true for the port of Corpus Christi: a new oil export terminal will add a lot of traffic, which could well result in congestion. Basically, as they solve their pipeline bottleneck problem, the oil producers in Texas will be facing another one on the coast.
It’s a puzzle that will be difficult to solve. U.S. oil has to go somewhere because there is no chance producers will simply start pumping less. Local refineries can only take in so much of it. The rest will have to be exported, and to make the situation more difficult, it has to be exported at competitive prices These would be hard to achieve with the high costs of transportation and loading to date. One or a couple of new terminals could go a long way towards solving this problem.
By Irina Slav for Oilprice.com
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