By Robert Campbell
NEW YORK, April 4 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 start 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.
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
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
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
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
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.