Analysis: U.S. pipeline reversal may challenge refiners

HOUSTON (Reuters) - Reversal of the Seaway pipeline will bring U.S. Gulf Coast refiners the cheaper Midcontinent crude oil that they have wanted for the last 18 months -- maybe too much of it.

Cheaper light, sweet crude from the Midcontinent will be a big part of the 150,000 barrels per day the Seaway will bring to the heart of U.S. refining at Houston when it reaches planned initial capacity.

Feedstock costs on the Gulf Coast already are reacting to the reversal, which started over the weekend. Light Louisiana Sweet fell to a discount to world benchmark Brent after months of selling at a premium.

LLS refining margins for Texas and Louisiana refiners grew $1.95 a barrel last week as LLS premiums have fallen from around $16 over West Texas Intermediate to $13 and lower, Credit Suisse said in its weekly refining report.

But the result could be a mismatch of oil supply and refining capacity in the region, Credit Suisse said, noting refining light crude is different from refining heavy in important ways.

"We believe light sweet crude processing capacity in the Gulf could be overwhelmed by 2014-2015 unless crude finds an alternate route to the East or West Coast," Credit Suisse said in its weekly refining report.

The reason is Gulf Coast refiners have geared themselves to handle heavy, sour crude in recent years because they expected lighter grades to decline. They also are receiving an unexpected surge of light crude from Texas' Permian and Eagle Ford shales.

Valero Energy (VLO.N), which operates both light and heavy refineries on the Gulf Coast, has studied the issue and believes it can adjust and handle as much as 200,000 barrels per day more of light, sweet, spokesman Bill Day said.

"There are ways to take advantage of the light, sweet crude that's becoming available," Day said.

Though a refinery like Valero's Houston refinery could run 100 percent light, a pure light feedstock might not be economically efficient at a more complex refinery like Port Arthur or Texas City designed to handle heavy, Day said.

"But you could blend it with other heavier feedstocks," Day said.

Indeed, increased imports of heavy, sour oil from Canada - awaiting U.S. approval of the planned Keystone Pipeline - will be key to making full use of the new U.S. bounty of shale oil, said Adam Bedard, president of the Bentek Energy consultancy.

"We'll see more and more blending as we mix heavy Canadian with light sweet to generate the equivalent of an intermediate sour, which will get it into refiners on the Gulf Coast. Certainly there's demand in the Gulf Coast for intermediate sour," Bedard told a conference in Houston last week.

(Reporting By Bruce Nichols; Editing by David Gregorio)