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.
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.