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Vol. 17, No. 19 Week of May 06, 2012
Providing coverage of Alaska and northern Canada's oil and gas industry

Alaska oil boomerangs

Due to refinery crunch, tankers return to Valdez with some crude still aboard

Wesley Loy

For Petroleum News

Normally Alaska North Slope crude oil flows one way — south, toward refineries on the West Coast.

In recent weeks, however, something odd has happened. Tankers have returned to the terminal at Valdez still partially laden with Alaska oil. Usually, the tankers come back empty.

So what’s behind this curious trend?

It appears to be a mix of oil inventory management decisions, cost considerations and reduced capacity at some West Coast refineries.

“It’s an unusual situation,” Steve Rinehart, spokesman for BP Alaska, told Petroleum News.

Five back-haul events

A number of tankers carrying oil for BP, which operates Prudhoe Bay and other North Slope fields, have returned to the Valdez Marine Terminal with some oil still aboard.

No other company’s oil tankers are known to have made similar returns.

Anil Mathur, the president of Alaska Tanker Co., the Beaverton, Ore., company that carries BP’s oil, declined to specify how much oil his ships have back-hauled. His company operates four double-hull tankers to carry BP oil between Valdez and West Coast ports.

A nonprofit organization that monitors the Valdez terminal and tanker operations has been keeping track of the back-hauling. The Prince William Sound Regional Citizens’ Advisory Council says that since late February, five ATC ships have returned to Valdez still partially filled after having not delivered their full cargoes to Lower 48 refineries.

Here are the five back-haul events, including the arrival date, ship name and volume of oil aboard:

• Feb. 27, Alaskan Explorer, 81,000 bbl

• March 20, Alaskan Frontier, 175,000 bbl

• April 11, Alaskan Explorer, 300,000 bbl

• April 28, Alaskan Frontier, 200,000 bbl

• May 2, Alaskan Explorer, 140,000 bbl

In-bound ships with oil aboard receive the same tug escort as fully loaded ships sailing out of Port Valdez into Prince William Sound.

Factors behind oil returns

Each ATC tanker has a capacity of 1.3 million barrels.

The tankers don’t offload oil at Valdez, ATC’s Mathur said. Rather, the tankers are topped off with more oil and then sent south again.

As to why ATC ships are returning with some cargo still board, Mathur said BP simply tells his company “what oil they want us to carry where.”

The back-hauling of oil to Alaska “has happened before,” he said, “but it’s not common.”

Although it seems odd, back-hauling actually makes sense under certain circumstances.

“The incremental cost of doing so is not that much,” Mathur said. The tankers are going to return to Alaska regardless of whether they’re empty or carrying some crude, he said, and the oil can act as ballast for the ships.

Leaving some oil aboard ship is not ideal, but it can give the owner “more flexibility” in placing it, Mathur said.

“Ultimately, all the oil gets placed in the Lower 48,” he said.

The major problem appears to be a capacity crunch at refineries that take a lot of North Slope crude.

BP’s Cherry Point refinery at Ferndale, Wash., remains down due to a Feb. 17 fire and a major spring maintenance turnaround.

Another big delivery point for North Slope oil is BP’s Carson refinery near Los Angeles. It also has undergone maintenance recently.

Complicating matters was some extensive maintenance at the ConocoPhillips refinery at Ferndale.

All these refinery constraints are important considerations as BP, ConocoPhillips and others continue to produce oil daily from the North Slope. That oil must go somewhere, so storage must be assured from the Slope to the Valdez terminal to the tanker fleet and ultimately at the refineries.

The refinery issues are expected to clear up soon. Spokesmen for BP Cherry Point failed to return phone calls seeking a status update. But a local newspaper report quoted one spokesman as saying the refinery is expected to resume normal operations in early May.

No Slope proration

In effect, keeping some oil aboard tankers is “storage in motion,” BP’s Rinehart said.

Managers have decided it’s the best and safest option in some cases, he said.

“This is basically managing inventory,” Rinehart said. “We expect it to be short-term.”

Joyce Lofgren, a petroleum economist with the Alaska Department of Revenue, sees a reasonable explanation for BP back-hauling oil.

“The economics of storing the crude in the tanker for a trip back to Alaska must have been better than the price required to offload,” she said.

Lofgren also believes the “larger market situation” is at work, with high oil prices driving soft domestic demand and oversupply.

“Less consumption and more supply sends crude to storage, inventories build and refineries adjust their operations,” she said.

At the Valdez Marine Terminal, the crude working inventory since March has ranged from 41 percent to 90 percent of storage capacity, said Michelle Egan, spokeswoman for Alyeska Pipeline Service Co., which runs the terminal.

The good news for industry is that no proration, or curtailment, of oil production on the North Slope has been necessary this year, she said.

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