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Houston’s shipping bottleneck could curb expansion of major US oil and petchems hub

An impasse has emerged between key operators on the Houston Ship Channel, a critical lifeline for growing US energy exports, as thriving activity in both tanker and container shipping has exacerbated competition for space.

Before August 2018, fog shutdowns were the main hindrance to ship traffic in and out of Houston, the second-largest petrochemical port in the world. However, that month the first container ship to exceed 1,100 feet in length traversed the 23-mile stretch between the entrance to the channel and one of the port’s two container terminals, facing no oncoming traffic, while outbound tankers were forced to sit and wait until it docked.

It was the first of 10 such ships with length and width too large to safely allow two-way traffic. All ships normally flow freely toward each other in the channel and veer around one another in a carefully orchestrated move dubbed the “Texas Chicken” to maintain consistent two-way traffic.

According to the Houston Pilots, who oversee ship traffic safety in the channel, the bigger container ships cannot safely veer around tankers because they essentially become 54% wider when at an angle. All other oncoming traffic – whether waiting to get in or leave the channel – must stand down for up to 10 hours or more until the container ship passes.

Click for full-size map

For companies that load and unload crude, refined products and liquid chemicals – as well as those who produce natural gas liquids – such traffic interruptions resulting from container ship arrivals are unacceptable. They say it could jeopardize export growth and chill investment throughout the entire 52-mile-long channel to Galveston that is home to nearly 300 facilities, including refineries, chemical plants, storage tanks and support infrastructure like pipelines, rail, import/export terminals and trucks.

“Reliable exports are absolutely critical to the energy value chain – and maintaining two-way traffic is essential to that reliability,” Enterprise Products Partners CEO Jim Teague told a Texas Senate committee in early March.

Port officials concede the importance of two-way traffic and insist that larger container ships will not cause frequent interruptions because they expect only about 19 to arrive in 2019. However, that estimate could change. The port authority has also rejected proposals from liquids operators for a moratorium on larger container ships until all sides have more time to study the issue, and a limit of one per week because two could possibly show up at the same time.

“We have container folks saying if we put a restriction on it, they’ll stop sending larger ships to Houston. That’s great for energy, but not necessarily for containers,”. Ric Campo, the newly appointed chairman of the Port of Houston Commission, told the same Texas Senate committee on March 6.

Both sides agree the ultimate solution is widening the of the 530-foot-wide channel to at least 750-800 feet to accommodate two-way traffic that includes larger container ships. However, such a project would likely cost billions of dollars and require Congress to provide federal funds – which can take years, if not decades.

The US Army Corps of Engineers is in the fourth and last year of a $10 million study examining whether it would be feasible to deepen and widen the channel, but it could be just an incremental step in a years-long process while two-way traffic interruptions continue.

Even if channel operators try to pool resources to widen the channel without federal funds, the Army Corps must first deem it a valid project, and it could take up to five years. Steve Kean, CEO of Kinder Morgan, said liquids operators need a solution now.

“It’s a little bit like there’s a fire in the house,” Kean said.  “We don’t want to let the entire house burn down before we do something about it.”  

Tankers were the main category of vessel moving through the Houston Ship Canal in 2018

So both sides are at impasse without a short-term solution that satisfies all, and the liquids operators have turned to the Texas Legislature to intervene. Multiple bills are pending that could limit or block arrivals of larger container ships, as well as address what the coalition sees as a conflict of interest with the port authority’s dual role as owner of the container terminals – benefiting from their cash flow –  and regulator of the entire channel.

Enterprise and Kinder Morgan, both major ship channel operators, with millions of barrels of liquids storage, export capabilities, pipelines and production facilities, are among 13 companies that banded together to form the Coalition for a Fair and Open Port, which wants certainty of consistent two-way traffic to ensure that all Houston Ship Channel exports can grow in tandem with onshore production growth.

Campo agreed that uncertainty “kills business,” but said new laws could lead to unintended consequences from restrictions in the future, and port officials fear a moratorium could prompt bigger container ships to bypass Houston permanently.

Growth all around

Houston is the top US crude oil exporter, shipping out about 2.5 million b/d. The Energy Information Administration expects US crude production to average 12.3 million b/d in 2019 and 13 million b/d in 2020. Most of that growth will be in the vast Permian Basin in West Texas and Southeast New Mexico, where projected output of 3.9 million b/d in 2019 could double by 2025. The EIA also expects the US will be a net crude and petroleum product exporter by late 2020.

“All that stuff needs to get from where it is to a place where it can get on a vessel,” Kean told the Texas Senate committee. “If the Permian doubles, we need the Houston Ship Channel to be able to take on more. There’s a conflict of interest when you have a port that is regulating us, but also is in business and competing for the scarce resources of access to the Houston Ship Channel.”

The port also is the top US polyethylene resin exporter, alongside startups of more than 13.67 million mt in PE capacity from 2017-2027, more than 76% of which is or will be in Texas and Louisiana. Of the total, 23% is in operation – most of that at or near the ship channel.

Both sides in the Houston Ship Channel dispute also have strong competition from other ports to handle growing crude and resin output.

The Port of Corpus Christi has spent years marketing itself as an alternative to Houston for energy exports, highlighting its proximity to the Eagle Ford shale in South Texas as well as the Permian Basin. While the port exports less than 1 million b/d currently, Carlyle Group is investing $400 million in a project awaiting regulatory approval to deepen the Corpus Christi Ship Channel to accommodate Very Large Crude Carriers that can hold up to 2 million barrels of oil.

Comparison of Houston and Corpus Christi port storage and export capacity

Industry sources note that, unlike Houston, Corpus Christi offers primarily exports and few other options for crude. Houston offers exports, more storage and refineries, as well as pipelines that can move oil further east to plants in Beaumont and Port Arthur, Texas, and to Louisiana. Channel operators want to boost their export market share on the back of crude production growth, and they say they need consistent two-way traffic to do it.

Container competition too

On the container side, ports in Charleston, South Carolina; Savannah, Georgia; New Orleans and Los Angeles are enticing PE producers and traders to send some plastic pellets their way for export. Of 4.3 million mt PE exports in 2018, 2.67 million mt were waterborne, with most shipped out of Houston and those ports. Of volumes exported by these five, Houston’s share fell to 74% in 2018 from 87% in 2017 while flows from the other four showed gains, according to US International Trade Commission data.

Houston exported 308,270 containers packed with resins and plastics in 2018 – nearly 30% of all containers and up 20.7% from 2017 – mostly on ships that did not disrupt two-way traffic, according to port data.

Chart showing Houston-Galveston leads among US ports handling PE resin for export

And pressure has been on for Houston’s container terminals to compete. The port answered concerns about a lack of consistent empty container availability by soliciting more imports, bringing loaded import containers to parity with loaded exports. The competitors, particularly Los Angeles and ports on the East Coast, are primarily import centers and can accommodate even larger container ships, which are growing in size amid ocean carrier consolidation.

“We know ultimately that we are going have more of those ships and we know ultimately we’re going to have more petrochemical exports and those exports are going to require bigger and more ships as well,” Campo said.

Growth at stake

However, the coalition contends that the vast majority of ship channel business involves liquids and natural gas, and those interests cannot be jeopardized by two-way traffic disruptions. In 2018, 71% of 18,790 ships that traversed the channel involved energy – 55% tankers, 10.5% natural gas and 5.6% barges. Of the rest, 11.1% were container ships, according to Houston Pilots data.

The US’ recent shale boom sharply accelerated the channel’s importance to the emergence of the US as a global energy supplier. In 2011, the US started moving out more refined products than it consumed. The lifting of a decades-old domestic crude export ban in 2015 allowed US oil to flow freely into global markets. And seemingly boundless cheap feedstock ethane reversed the once-downtrodden US chemical industry’s fortunes, spurring tens of billions of dollars in new infrastructure to turn that overabundant feedstock into export-bound resins and other petrochemicals.

But bottlenecks caused by larger container ships could send more outflows to competitors.

“It’s the biggest sponge,” Enterprise’s Teague said. “You have water access through one of the most important waterways in the world – unless we screw it up.”