The rapid build-out of new and expanded pipeline capacity is now beginning to transport steadily-rising volumes of oil, natural gas and natural gas liquids from the Permian Basin to the Gulf Coast. These volumes of light, sweet crude already exceed the capacity of refiners to process the oil into gasoline and other products, and are now testing the capacity of the coastal port system to accommodate demand for crude exports.
The U.S. Energy Information Administration (EIA) reported that crude exports for the week ending May 10 surged back over 3.3 million barrels of oil per day (bopd) after having fallen to as low as 2.3 million bopd in early April. As the new pipelines and pipeline expansions are completed over the next 12 to 24 months, demand for expanded export capacity will rise apace.
A new report from industry solutions firm DrillingInfo starkly illustrates the industry's new normal. That report finds that “Every incremental barrel of production since the middle of 2016 has been exported. As U.S. crude oil production grows, all incremental barrels are (and will continue to be) exported," according to the firm's Vice President of Market Intelligence, Bernadette Johnson.
The DI report further finds that "The U.S. supply growth is likely to be exported rather than displacing currently imported volumes." While some refiners, like ExxonMobil, are currently working on expansions designed to increase their capacity to process the light, sweet crude coming out of the Permian, the Eagle Ford and other shale basins, such expansions are highly capital-intensive.
They make sense for a vertically-integrated company like ExxonMobil, which plans to direct its own equity production to the new capacity. But for independent refiners, it makes more financial sense to continue refining heavier crudes imported from other nations.
As a result of this new energy reality in the U.S., the International Energy Agency (IEA) projected in March that the United States will export as much as 9 million bopd in 2024, enabling it to challenge Russia and Saudi Arabia as the world's top oil exporter. Obviously, U.S. ports along the Gulf Coast and elsewhere are not currently equipped to accommodate such demand, so the next few years will see a plethora of new projects designed to meet and profit from it.
That dash to meet demand has already begun, in fact. As I discussed here in February, much of that scramble centers around the City of Corpus Christi, Texas, where a variety of projects to export both crude oil and LNG are underway.
Where crude oil is concerned, the Port of Corpus Christi (PortCC) has two projects underway. One is designed to deepen and expand its main port channel to accommodate the VLCC class of oil tankers that are capable of carrying 2 million barrels of crude. The effort to secure full funding for the Army Corps of Engineers to dredge the channel has been underway for three years and has been met with the typical array of roadblocks and hiccups common in the federal process.
The second project, in which PortCC has partnered with the asset management firm Carlyle Group, targets nearby Harbor Island for the building of a satellite facility capable of loading VLCCs. Carlyle made two key announcements in recent days, the first being that it is negotiating the sale of a 25% stake in the project with three different firms engaged in the operations of pipelines and terminals.
The second announcement by Carlyle is that it has filed an application to the Federal Permitting Improvement Steering Council (FPISC) asking that the project be placed on a fast-track list of key infrastructure projects overseen by the FPISC. Carlyle hopes that being placed on that list will ensure the issuance of all necessary federal, state and local permits for the project within two years. Although Carlyle and PortCC have an agreement-in-principle in place, Carlyle has not made a final investment decision to proceed with funding what will be a $400 million project to deepen the ship channel at Harbor Island, and considers the fast-tracking of the permitting process key to making that decision.
A variety of other crude export projects are underway along the Gulf Coast, but all will have to deal with their own problems and delays involving funding and permitting. Obviously, the process of moving these projects from cradle-to-grave is highly-complex and costly.
If you're wondering why these ports and companies didn't think to start these projects sooner, remember these two facts of recent history:
- Prior to December, 2015 it was illegal to export domestically-produced crude without a very restricted permit from the U.S. Department of Commerce; and
- As recently as three years ago, literally no one saw the magnitude of new U.S. crude production coming.
But now the scramble to meet demand is on, and it is going to be very interesting to observe.
