COLUMN-US East Coast crude oil imports set to plunge: Campbell

Fri Dec 7, 2012 11:30am EST

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By Robert Campbell

NEW YORK Dec 7 (Reuters) - Imports of foreign crude oil by U.S. East Coast refineries will plunge next year, leaving more West African light sweet crude oil looking for a home in the European or Asian markets.

New rail facilities set to open up and down the coast next year will give regional refiners the chance to replace a significant chunk -- perhaps half or even more-- of the roughly 750,000 barrels per day in non-Canadian foreign crude they currently import.

Factor in the possibility that U.S. crude oil from the Gulf of Mexico could start being shipped to Eastern Canadian oil refineries by tanker and a potentially dramatic shift in the Atlantic basin market seems poised to occur.

First consider the growing rail infrastructure. Two railway terminals at Albany, New York will have a combined nameplate capacity of 295,000 bpd of crude.

Early next year rail unloading capacity at PBF Energy Inc's Delaware City refinery will rise to 110,000 bpd. A similar story is unfolding at the nearby Philadelphia Energy Solutions' refinery, where rail unloading capacity will rise to at least 140,000 bpd.

These three sites are only a sampling. Other terminals are near completion in Virginia and Florida, where they will have easy access to coastal barge networks.

The PBF facility may well be used to bring Canadian heavy crude to the East Coast as the two PBF refineries at Paulsboro, New Jersey and Delaware City, Delaware are the most capable of handling lower quality crude in the coastal region.

That's a potential threat to Saudi Arabia's presence in the U.S. East Coast market as PBF is the sole customer for the OPEC heavyweight's crude in the region.

That could well come as a godsend to hard-pressed Canadian heavy oil producers who are currently facing prices below $60 a barrel in Alberta amid pipeline constraints and heavy inland competition for market share.

The other large, vulnerable chunk of the market is largely made up of West African suppliers. Angolan and Nigerian crudes figure prominently in the supply slate for most of the region's refineries.

West African grades, in particular, are likely to struggle to compete on price with shale crudes, even if the huge costs to move crude by rail then barge to refineries are included.

DATED BRENT EFFECT?

Since West African oil generally prices at a premium to Dated Brent and then must be shipped to the U.S. at a cost of a few dollars a barrel, these crudes are likely among the most costly imported barrels in the United States.

Thus, so long as inland North American light sweet crude remains cheap enough for refiners to be able to cover the enormous costs of shipping it by rail, West African crude should lose market share on the East Coast.

The impact of this sort of displacement should not be underestimated. Already the loss of market share on the U.S. Gulf Coast has put the price of West African crude under pressure and provided some limited relief to European refineries hard pressed by the natural decline of North Sea oil production.

For instance, U.S. East Coast refineries imported some 400,000 bpd of West African crude in September, according to U.S. government data.

If only half of that amount is displaced back into the Atlantic basin market some 6 million barrels of crude would have to find a new home every month either in Europe or Asia.

Further displacement of West African crude from the North American market may well push the prices of some of these barrels to parity or below Dated Brent, giving European refineries more room to maneuver in the face of very high North Sea crude prices.

Whether any movement in West African crude pricing will be sufficient to have a significant impact on the structure of Brent futures prices is still unclear.

For now the shrinking pool of cargoes available to deliver against the contract is likely to offset the incremental supply gains in the Atlantic basin from West African crude being pushed out of North America.

LLS TO MONTREAL?

Equally interesting is the likely possibility that Canadian oil refiners will buy crude oil on the U.S. Gulf Coast for shipment to refineries in the Canadian Maritime provinces and on the St. Laurence River.

Unlike U.S. refineries, which would face high shipping costs due to the constraints imposed by the Jones Act, Canadian refineries would be free to charter foreign-flagged tankers to move oil between ports in Louisiana and Texas and Canada.

While U.S. law generally bars exports of crude oil, shipments to Canada have long been allowed and the U.S. government has been granting new permits to move oil across the northern border.

Already oil terminals along the Gulf Coast, including the Louisiana Offshore Oil Port are retooling to facilitate the loading as well as unloading of crude oil cargoes.

That puts the pieces into place for Light Louisiana Sweet to move northward to displace West African crude from Canada if the price is right. Given the high cost of West African oil and the relatively cheap price for tanking shipping up the coast, these new movements should be logistically easy.

But of course, all of this picture only hangs together if inland North American crude prices stay substantially below world prices. Rail movements to the coast are impossible without a difference of some $15 to $20 below the landed cost of imported crude.

Similarly, any sustained strength in LLS prices would kill off the movement of U.S. crude between the Gulf Coast and Eastern Canada.

This is the dilemma facing coastal refineries that have pinned their hopes on cheaper crude supplies from inland markets. So long as inland producers face bottlenecks in getting their oil to market, discounts should be sufficient to make it economical for barrels to move on trains to the coast.

But if market opportunities exceed supply, the inland price will rise sharply to the point that marginal buyers are squeezed out and forced back into the West African market.

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