5 Min Read
HOUSTON (Reuters) - The Seaway pipeline began pumping crude from Cushing, Oklahoma, oil tanks to the heart of the U.S. refining industry in Houston on Saturday, marking a historic shift in the way oil flows across the United States.
The first barrels went into the line about noon CDT (1700 GMT) Saturday and volumes were expected to increase within days to 150,000 barrels per day (bpd), spokesman Rick Rainey of operating partner Enterprise Products (EPD.N) said by email. Enbridge Inc (ENB.TO) is a 50 percent partner in the project.
The startup is the first direct link from Cushing to the Gulf Coast, the biggest U.S. refining center. Cushing is the delivery and storage point for the U.S. benchmark oil futures contract, which represents a blend of crudes from the Midwestern states. It has been landlocked in Cushing and steeply discounted to world prices as a result.
The average motorist will not see much, if any, difference in gasoline pump price but oil producers and Gulf Coast refiners expect profits to improve. Many argue the reversal is the start of a trend toward reduced U.S. dependence on crude from the Middle East and elsewhere overseas.
Historically, the 669-mile (1,077-km) Seaway system had flowed from the Gulf Coast to Cushing, carrying crude oil from South Texas, but had been underutilized recently.
The first oil will take 12 days to reach Houston, 550 miles south of Cushing, but market anticipation of the event already has lifted inland crude prices in North America, although analysts disagree how much and how fast prices will change with the reversal of Seaway.
The spread between U.S. benchmark West Texas Intermediate and global benchmark Brent, similar crudes historically priced at near parity, narrowed to $15 from almost $19 Wednesday. It was as much as $28 late last year, costing U.S. and Canadian oil producers billions but boosting profits for Midwestern U.S. refiners.
The Seaway pipeline, which goes to Freeport and Houston, opened in 1995 with a south-to-north flow. A surge in Canadian oil sands output and U.S. shale oil production, however, has rendered the south-to-north flow unnecessary.
Interest in reversing Seaway to flow north-to-south intensified in the past 18 months as Cushing inventories surged and NYMEX WTI fell to unprecedented discounts. Cushing stocks hit a record 45 million barrels last week.
Last fall, ConocoPhillips (COP.N) sold its 50 percent interest in the line to Enbridge, which then agreed with co-owner Enterprise to reverse Seaway. It has taken several months of work on pump stations to bring the plan to reality.
A new pump station is under construction at the Cushing end to allow flows to reach 400,000 bpd in early 2013. Ultimately, Enbridge and Enterprise plan to more than double the line's capacity to 850,000 bpd.
That and other planned pipeline projects, along with rail and barge transportation of crude, will be required to ease the Midwestern oil oversupply more fully and permanently, most analysts have said.
"One theory is that once barrels start moving out of Cushing and the pipeline expands to 300,000 or 400,000 bpd by early 2013 the spread will narrow. We're seeing some of that," said Tom Bentz, director of BNP Paribas Commodity Futures in New York.
"The other theory is that even though crude is moving out, there is still more coming into Cushing due to increased Canadian and U.S. production. Also North Sea (Brent) production problems will keep the spread very wide," Bentz said.
Analysts had mixed opinions whether the first crude down Seaway would be light sweet or heavy sour or a mix. The type of oil makes a difference to refiners as well as pipeliners. Much of the stored oil at Cushing is now Canadian heavy sour.
Enterprise did not disclose the initial mix of oil grades.
Light oil is easier to handle at pipeline startup than heavy, making light the likely choice, said Abudi Zein of Genscape, an industry data monitor.
"The biggest bang for the buck would be to displace foreign light sweet with much cheaper domestic light sweet," said Rusty Braziel of RB Energy consultants in Houston.
Mark Routt of KBC Advanced Technologies in Houston had a different opinion. Heavy crude costs more to pipeline than light crude but Gulf Coast refiners are geared for cheaper heavy, he said.
"My guess is that slightly more heavy than light will be flowing," Routt said.
Reporting By Bruce Nichols; Editing by Bill Trott