CORRECTED-COLUMN-Coming soon: a Louisiana crude oil glut-Campbell

Fri Apr 6, 2012 11:42am EDT

By Robert Campbell

NEW YORK, April 4 (Reuters) - Oil refineries in Louisiana are likely to get a taste of the fat profits enjoyed by plants in the North American interior perhaps as soon as this summer when a major Gulf of Mexico pipeline currently used to deliver crude to Texas will stop moving oil westward.

Royal Dutch Shell wants to start work on a $100 million reversal of its Ho-Ho pipeline system as soon as August, according to an application filed with U.S. regulators.

(Link to Shell filing:)

The project will remove from service a 360,000 barrels per day pipeline that currently transports crude oil from the pipeline hub of Houma, Louisiana to Port Arthur, Texas and onward to Houston.

Shell has not given a firm date for ending westbound service on Ho-Ho but wants to begin eastbound service by the first quarter of 2013.

Other similar pipeline reversal projects, such as the Seaway pipeline reversal, have seen pipes taken out of service for months before the reversed operations begin.

The result is likely to be a bottleneck that constrains the movement of some offshore oil streams, likely driving down the price of some grades of crude in Louisiana.

Houma is a major landfall point for crude oil produced in the Gulf of Mexico, including the Eugene Island and Poseidon pipeline systems.

It is also a key junction for moving oil west out of the Louisiana Offshore Oil Port, including domestically produced crudes from the Thunder Horse and Mars platforms in the Gulf.

To be sure, there are alternate routes out of Louisiana for crude oil, but as Ho-Ho, according to Shell, "(operates) at or near capacity in its current service," it is almost inevitable that its removal from service will lead to disruptions in the market.

Shell does plan to build a new, larger westbound pipeline system (called Westward Ho) that will start up in 2015 and resume carrying Gulf of Mexico crude to Texas but for the next two years or so Louisiana refiners should enjoy cheaper crude.

CUSHING SPREADS SOUTH

It is not immediately clear what the overall market impact will be of the reversal. Initially, the reversal will cut purchases of imported crude oil by Louisiana refiners. Yet some, if not most, of these barrels will likely be taken up by Texan refiners losing access to Louisiana crude.

But the situation gets more complicated from early 2013. By then the Seaway pipeline from Cushing, Oklahoma to the Houston area will be shipping 400,000 bpd of domestic and Canadian crude.

Other pipelines, including Magellan Midstream Partners' Crane-to-Houston project and a flurry of ventures aimed at moving Eagle Ford crude to Houston should also be in service.

The result will likely be a sharp reduction in foreign crude imports into Houston but also may lead to a localized glut of light sweet crude as most Texas refineries are set up to optimally process heavier grades of oil.

But the Ho-Ho reversal will also feed into the pressure on Gulf Coast crude prices in Louisiana by further upsetting the balance there.

The deepwater barrels that cannot get onto a pipeline heading into Texas will face price pressures on their way to market from the new light barrels on Ho-Ho as well as the expected increase in Gulf of Mexico output.

Of course, nothing here means that the Gulf Coast will experience anything like the massive discounts seen at Cushing in recent years.

The overall impact will be muted by the ongoing need for imported crude oil to fill these refineries and the fact that they are likely to avoid the brunt of the impact of the expected fall in U.S. oil demand by stepping up exports.

Nevertheless the trend should be welcomed by oil markets. Much of the buildup of U.S. and Canadian oil production in recent years has had only the slightest impact on global trade flows due to its confinement to inland markets.

The irruption of the "Cushing problem" on the Gulf Coast will have a more pronounced effect.

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