First crude has entered the reversed Seaway pipeline, relieving 150,000 barrels per day of the squeeze at Cushing, Okla., but as fast as one problem gets help another surfaces.
The Enbridge-Enterprise Products Partners joint venture covers 500 miles to Freeport, Texas.
It is designed to carry more crude from the Permian basin in West Texas and southeast New Mexico and ease congestion at the Cushing hub caused by surging volumes from the Bakken and Canadian oil sands.
But Paul Sankey, an analyst with Deutsche Bank, said in a report May 14 that Seaway will transfer the bottleneck to Midland, Texas.
“With pipeline capacity constraining booming Permian oil supply growth, Midland crude prices have blow out relative to WTI (at Cushing), which itself is already heavily discounted,” he wrote, warning that Seaway may well “exacerbate this discount, as it will alleviate oversupply at Cushing, but do nothing for the Midland bottleneck.”
The WTI Midland-WTI Cushing price differential was just under $9 per barrel a month ago, the widest in 11 years and on May 14 had shrunk to under $5.50 per barrel.
Permian production rising
Other analysts say Permian production is rising fast at a time when there is pressure on all options to move crude to new markets.
The U.S. Energy Information Administration reported that from January 2011 to February 2012, the basin’s output rocketed upwards by 350,000 barrels per day to 1.6 million bpd and some believe that 2 million bpd is not beyond question.
However, Seaway is expected to soften the differentials between Cushing and Brent-based crudes along the Texas Gulf Coast, which exceed $25 per barrel last year.
The pipeline is also scheduled to offer 400,000 bpd of space by early 2013 and 850,000 bpd by mid-2014.
Sankey said that based on a Seaway transit time of about 15 days and transport rates of $3-$4 per barrel the early shipments should put “downward pressure” on Louisiana Light Sweet grades, which are currently trading at a $1-$2 per barrel discount to Brent, compared with a $1-$2 premium over the 30 days to May 15.
New takeaway needed
Other analysts argue that the answer to the Midland bottleneck will be the same as that of Cushing — add new takeaway capacity.
Greg Armstrong, chief executive officer of Plains All American Pipeline, told analysts earlier in May that up to $500 million of investment may be needed in the Permian basin to meet pent-up demand.
Seaway’s launch was facilitated by the U.S. Federal Energy Regulatory Commission which temporarily accepted the tariffs proposed for shippers, although it said the tariffs were “subject to refund and conditions.”
The pipeline proposed an initial per-barrel rate of $3.82 for light crude and $4.32 for heavy crude for uncommitted shippers.
FERC said it wanted a hearing to address issues related to the rates application to be held by June 4.
