Analysis: Texas shale makes fine oil cocktail for Gulf plants

NEW YORK Thu Oct 6, 2011 2:28pm EDT

A drilling rig in the Eagle Ford Shale in South Texas is seen in this Petrohawk Energy Corporation handout photograph released to Reuters on July 14, 2011. REUTERS/Petrohawk Energy Corporation/Handout

A drilling rig in the Eagle Ford Shale in South Texas is seen in this Petrohawk Energy Corporation handout photograph released to Reuters on July 14, 2011.

Credit: Reuters/Petrohawk Energy Corporation/Handout

NEW YORK (Reuters) - U.S. Gulf Coast refiners watching Midwest rivals reap hefty profits from an influx of cheap Canadian crude should take heart: there is relief in your backyard from Texas plus much more is coming.

The booming Eagle Ford shale deposits in southeast Texas offer regional refiners the opportunity to whip up a crude cocktail cheaper than imported and domestic offshore competition.

The cost benefits will get even better when new pipelines enter service that will bypass current bottlenecks and give refiners access to surging supplies of cheap crude from North Dakota and Canada.

Shale oil from the Eagle Ford deposit in southeast Texas has come on strong this year, rising to 272,000 barrels per day (bpd) in June from 70,000 bpd in April, according to energy consultancy Bentek. Some experts say it could top 400,000 bpd by 2013, enough to virtually back out all the region's imports from Nigeria.

The short shipping distance from the Texas shale fields to refiners on the Gulf Coast -- home to 40 percent of the nation's capacity -- will deliver the region a cheap source of high quality crude that should curb import requirements.

As production continues to rise it will knock out OPEC crude of similar quality like Algeria's Saharan Blend and Nigeria's Brass River. Reuters estimates show Gulf Coast refiners are already processing up to 200,000 bpd of Eagle Ford crude.

When production from Eagle Ford, the Bakken and other plays grow enough to surpass the needs of Gulf Coast refineries that can run it, some industry players say additional volumes could even be barged up to the East Coast or even exported.

The Texas play, as well as other unconventional deposits like the Bakken shale and the Canadian tar sands, have already driven down crude costs for refiners in the U.S. Midwest and to a lesser degree the U.S. Gulf Coast. There is promise of even greater benefits to refiners as output grows and pipeline infrastructure improves.

"Eagle Ford shale, and the other shale oils like Bakken, Niobrara, will make winners out of the U.S. refining industry as a whole," said John Auers, senior vice president of Houston-based consultants Turner Mason.

"It will allow the U.S. refiners to become the most effective in the world. Very few barrels of Brent-based pricing crude will be imported from Africa and the Middle East."

Refineries dependent on imported crude tied to Brent crude pricing, like those from the North Sea and Africa, have seen markets come under pressure as the international benchmark hit a record premium of over $27 a barrel to U.S. crude this year.

Rising flows of Bakken crude from North Dakota and Canadian oil sands crude have sent inventories in the Midwest to all-time highs this year. Due to a lack of pipelines, this crude is unable to reach the Gulf Coast in large volumes, thus driving up prices for offshore U.S. crude and imports to levels close to those of Brent.

Refining economics for the area will improve when new pipelines are built to ship crude from the Midwest to the Gulf Coast. Until then, analysts said Eagle Ford crude, along with the Canadian and Bakken crude able to reach the Gulf Coast by rail or truck, has provided some relief.

Graphic: link.reuters.com/qyw24s

In April 2011, light sweet crude imports into Texas and Louisiana refining centers averaged 528,000 bpd. Most of that came from Algeria, followed by Nigeria, Mexico, the United Kingdom, Russia, Venezuela and Kazahkstan, according to U.S. government data.

This was considerably less than the 2010 average of 818,000 bpd, which comprised 27 percent of all regional oil imports, according to Houston consultants Baker & O'Brien who compiled government data to arrive at their conclusions.

The home-grown feedstock will be a boon for simpler Gulf Coast refineries, such as Valero Energy Corp's (VLO.N) 100,000 bpd refinery in Three Rivers, Texas, which do not have the sophisticated equipment to run cheaper, heavy sour crude that is imported from Saudi Arabia, Mexico, Venezuela, and others.

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