By Robert Campbell
NEW YORK Dec 7 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
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
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
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
Similarly, any sustained strength in LLS prices would kill
off the movement of U.S. crude between the Gulf Coast and
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.