HOUSTON/CALGARY BP Plc (BP.L) has started up a major new coking unit at its Whiting, Indiana, refinery, sources familiar with the facility's operations said, a delayed but crucial last step in the revamp of the sprawling plant so it can run mostly heavy Canadian crude.
The 102,000 barrel-per-day (bpd) coker, which began the lengthy start-up process earlier this week but may not reach full rates until next year, is a milestone in the $4 billion overhaul of the refinery, a project that has whipsawed oil prices on several occasions this year.
The new delayed coker, the last of four major units to be built or upgraded at Whiting, will mean the 405,000 bpd refinery can swap out generally more expensive light, sweet oil for discounted oil sands crude from Alberta, likely lifting Canadian prices that have languished for much of this year.
Industry intelligence service Genscape and the sources familiar with Whiting operations reported activity on the coker on Thursday. A BP spokesman declined to discuss operations.
The change is also likely to result in more of the booming Bakken supplies heading further south, pressuring Midwest prices. The discount for U.S. benchmark crude at the Cushing, Oklahoma, hub versus Brent has widened by more than $5 in the past five days, the biggest five-day slump since early 2012.
BP has said the project will allow Whiting to run about 85 percent heavy crude, up from just 20 percent prior to the revamp.
"Whiting has been running a light sweet slate while the coker was getting back up to speed. You're at a point of the transition now and you will see demand destruction for light sweet oil in the mid-continent," said Stephen Schork, editor of the Schork Report in Villanova, Pennsylvania.
"Oil will have to discount, that is why you are seeing Brent moving as more of a premium to WTI."
BP has said the coker, which boosts the yield of motor fuel from a barrel of oil and converts residual crude to petroleum coke, a coal substitute, would begin operating by year-end.
BP officials said on a conference call in October that the transition to heavy Canadian crude would take place during the first quarter of 2014.
The Whiting overhaul was commissioned years ago, a time when the future for U.S. refiners seemed to be a growing supply of heavy crude from Canada. Instead, refiners have been deluged with a surge in domestic light, sweet shale crude.
Traders in Calgary have kept a close eye on the progress at Whiting, and said delays to the project contributed to Western Canada Select's recent slump to a 10-month low of $41.50 per barrel under the WTI benchmark last week.
WCS heavy blend for December delivery, the benchmark Canadian heavy crude, climbed to $34.35 per barrel below WTI, up $1.40 from Wednesday, according to Shorcan Energy Brokers. That discount may narrow further as Whiting ramps up.
"When you look at what this means for Canadian heavy it's around 102,000 bpd of demand. That's quite significant especially when you look at Imperial Oil's (IMO.TO) Kearl project bringing on about that same amount in this past year," said David Bouckhout, senior commodity strategist at TD Securities in Calgary.
"This is a good fit - there's more supply coming on and now the demand to absorb that," he added.
The investments and Whiting are at the center of BP's U.S. refining strategy to focus on plants with easy access to Canadian crude production areas. Earlier this year, BP completed the sale of refineries in California and Texas.