Analysis: Shale oil: from curse to cure for U.S. East Coast refiners?
NEW YORK |
NEW YORK (Reuters) - In 1902, the S.S. Paraguay set sail from Texas carrying the first shipment of 400,000 barrels of oil from the Spindletop field to a new refinery on the Delaware River.
The Pew family, which had large holdings in Texas, built the plant to help absorb the gusher of crude that had unexpectedly emerged in east Texas, which lacked refining capacity and sufficient demand for the fuel. The Marcus Hook, Pennsylvania plant, perched at the tip of a spit of land, would provide both.
Amid another U.S. oil market upheaval more than a century later, the roles are reversed: a new kind of oil from Texas and North Dakota may rescue some East Coast refiners from the brink of oblivion, providing a local alternative to the costly imported crude that had threatened to put them out of business.
While it appears too late to spare Marcus Hook, which has been shuttered since December, evidence of new buying interest has emerged this week for two other major plants, potentially saving the Northeast region from a summer fuel squeeze that had unnerved politicians all the way to the White House.
Sunoco Inc SUN.N, which owns Marcus Hook, received a handful of bids this week for its 335,000-barrels-per-day (bpd) Philadelphia refinery, the region's biggest, sources familiar with the bidding process said. It has threatened to shut the plant if not sold by July 1.
One of those bidders is counting on the boom in light, sweet shale oil to help resuscitate the ailing sector, which has been squeezed between costly, imported light crude, falling gasoline demand and new, more sophisticated overseas rivals.
Preferred Sands LLC, which has grown in five years to become the third-largest supplier of sand and proppants to the hydraulic fracturing industry, touts its deep connections in the shale patches of Bakken, North Dakota, and Eagle Ford, Texas, plus more than 1,500 rail cars with connections to major railroads.
"We will continue to run it as a refinery and use our substantial logistics experience and leverage our oil industry knowledge," said Mike O'Neill, founder and chief executive of Preferred Unlimited, the parent company.
ConocoPhillips' (COP.N) 187,000-bpd Trainer refinery, also for sale, is said to have attracted some interest.
The sales have become charged on a political level over potential job losses and regional fuel shortages. But concerted efforts of federal and local legislators, union workers and others may now be paying off.
"It's gratifying to know that there are serious, well-financed prospects to purchase the Philadelphia refinery," Pennsylvania Senator Bob Casey said. "I also know Mike O'Neill to be a successful and sophisticated entrepreneur."
BY LAND OR BY SEA
The Marcus Hook, Trainer and Philadelphia refineries were in many ways casualties of the surge in U.S. shale oil production, an unexpected boon that emerged from the hydraulic fracturing technology first applied to natural gas fields.
As production in landlocked North Dakota and Canada surged, crude prices plunged in the Midwest, giving refiners there a profit advantage that allowed them to chip away at the East Coast market. Some of that oil made it as far south as Louisiana and Texas by rail, but little of it moved east.
But late last year, Sunoco and Conoco tested light, sweet Bakken crude from North Dakota at their plants, with an estimated 10,000 and 20,000 bpd of Bakken oil railed to Albany, New York and then barged down to Philadelphia, traders said.
However, Lynn Elsenhans, then Sunoco's chief executive, said in November that Sunoco Logistics (SXL.N) lacked the assets to bring enough crude east to make it economical.
Enter Preferred, which says its train connections give it a leg up over other bidders. It already hauls tons of sand or silica from plants in Nebraska and Arizona to the shale patches in other states, where the "proppant" is injected into wells to allow oil and gas to flow out.
That diet of cheaper, domestic crude would help the Philadelphia plant wean itself away from the Angolan, Azeri, Nigerian and Norwegian oil that is now its mainstay -- and which costs some $20 a barrel more than U.S. benchmark West Texas Intermediate and $35-plus more than North Dakota's Bakken crude, according to Reuters data.
In January, Sunoco imported 10.3 million barrels (about 343,000 bpd) of crude from those countries, U.S. government data shows, enough to run the Philadelphia refinery.
"Any drop of midcontinent crude which replaces Brent is a drop in the right direction," said Mark Routt, senior analyst with Houston-based KBC, a refinery consultancy.
Oil output from U.S. shale oil plays will top 800,000 bpd by 2016, according to estimates by energy consultancy Bentek Energy, doubling over four years. While initial results from five Utica shale wells last year in Ohio disappointed some analysts this week, that is unlikely to dim enthusiasm substantially for the sector.
It's not only about quantity. So far, the major shale oil crudes are light and sweet, increasingly a poor match for geared-up Midwest and Gulf Coast refiners that have invested billions of dollars to run cheaper, heavy grades -- but a godsend for the simpler plants on the East Coast.
Despite less-than-stellar initial results, Bentek executive Jim Simpson points out that the Utica formation is only 200 miles west of the East Coast refineries.
"Can the refineries be saved or is there too much of a disconnect?" said Simpson, who added that Utica crude with its 35 degree API -- a measure of density -- was a good match for East Coast appetites.
"It depends if the Utica comes online fast enough. It might make sense to spend the money on the refineries if you knew you had secure supply of crude at a WTI price," Simpson said.
Another shipping option comes from the north.
Canadian pipeline giant Enbridge Inc (ENB.TO) is mulling the reversal of a 240,000-bpd Montreal-to-Sarnia line to carry oil sands from the west. The reversed Line 9 would then feed the Portland pipeline, which could carry shale oil from Montreal to Portland, Maine and onto tankers where it could be shipped down the coast.
Still more may come by sea, retracing the S.S. Paraguay's voyage 110 years ago.
At least 100,000 bpd of Eagle Ford shale oil will reach the port of Corpus Christi this summer as new pipelines come onstream, allowing oceangoing barges to carry 100,000 to 150,000 barrels each or small ships carrying 300,000 barrels to the Gulf and East coasts.
"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 refinery consultants Turner Mason.
(Additional reporting by Bruce Nichols in Houston and Tim Gardner in Washington; Editing by Jonathan Leff and Dale Hudson)
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