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US crude exports are the gift that keeps on giving: Fuel for Thought

Favorable price differentials are leading to growing US crude exports from the Gulf Coast, which in turn is helping to fuel an infrastructure buildout that will encourage even more exports and new entrants into the US market.

Crude oil exports have increased recently amid widening discounts for both WTI Midland and WTS (West Texas Sour) Midland.

So far in July, the average discount of WTI Midland was WTI cash minus $1.05/b, down 21 cents from June. WTS Midland discounts over the same time have fallen to WTI cash minus $1.18/b, down 9 cents, according to Platts data.

A wider discount makes grades like WTI and WTS more attractive to export.

WTI Midland weakening

Arbitrage economics have been reinforced by a widening WTI/Dubai spread. Month on month, the swap spread between WTI and Dubai widened 20 cents/b to $1.22/b last week. As this spread widens, WTI-based crudes like Bakken become more economic choices in countries like China, providing stiff competition to pricier Dubai-based imports.

The discounts are driven not only from increased production from the Permian, there have been increased flows south from the Bakken via the southern leg of the Dakota Access Pipeline—called the Energy Transfer Crude Oil Pipeline (ETCOP). These barrels have flooded the region with supply. With a 38-40 API, 0.2% sulfur Bakken is similar to WTI Midland.

As a result, US crude exports averaged 9.338 million b/d ago, up 568,000 b/d since the end of 2016, according to the latest US Energy Information Administration report on exports.

Deals show export demand remains strong

Two weeks ago, commodity trader Trafigura said it had signed an offtake deal for 100,000 b/d of crude and condensate with Plains All American Pipeline for exports out of Corpus Christi on the Gulf Coast.

Also early this week, Indian Oil Corp told S&P Global Platts it had finalized a deal to lift 1.6 million barrels of US crude from the Gulf Coast with shipments due to start this fall. The deal also includes another 400,000 barrels of the Western Canadian Select blend.

Not only are the offtake deals evidence of a growing appetite for North American crudes, they are a vote of confidence that the spreads favoring US exports will continue to do so.

New marine export docks, storage

To keep pace with growing demand for exports, Magellan Midstream is expanding its dock capacity at Galena Park and moving ahead with the second phase of its Seabrook facility in Houston, spokesman Bruce Heine said.

Upon completion, “Seabrook Logistics will be connected to our Houston area crude oil distribution system and accommodate crude oil and condensate exports,” he said.

Magellan is targeting to complete the expansion, which will provide 1.7 million barrels of storage, by mid-2018, Heine said.

“We also have a strong position in the Corpus Christi market and an expansion of the Pasadena refined products terminal is moving ahead,” he said.

The terminal will have an initial capacity of 1 million b/d and will provide export services early 2019, Heine said.

Plains, Magellan open seasons underway

Growing output from the Permian Basin has also fostered interest in more pipeline throughput to move crude oil to Cushing, Oklahoma, and to export markets. There will be open seasons for two pipelines due to close over the next three weeks, offering a total of 250,000 b/d of additional throughput.

The first will be 110,000 b/d pipeline that Plains plans to build from the Delaware Basin in the greater Permian play to Cushing. Commitments for the line are due July 17.

This will be followed by a further 100,000 b/d to 140,000 b/d expansion of the BridgeTex pipeline to 440,000 b/d, for which producers have a deadline of August 4 to book capacity. The BridgeTex pipeline, operated by Magellan and Plains, connects Colorado City in the Permian to the Houston market.

Both open seasons follow an announcement by fellow midstream player Enterprise Products Partners, which said it signed up additional shippers for 35,000 b/d on its Midland to Sealy pipeline.

With Energy Transfer planning to add 100,000 b/d to its Permian Express pipeline, followed by Medallion adding another 120,000 b/d to its Wolfcamp Connector and Howard Lateral and another 90,000 b/d of new capacity by Plains at its Cactus Pipeline, a total of 360,000 b/d of new throughput will be added by end 2017 in the Permian Basin alone.

In fact, new takeaway capacity is expected to rise roughly 3 million b/d by the end of the year in the basin and most of it will be needed.

Platts Analytics Bentek Energy projects Permian output rising to 2.95 million b/d from the current 2.557 million b/d.

The tightening takeaway capacity to production should keep Midland price discounts from widening like they did in 2014, when lack of takeaway capacity sent WTI Midland averaging at a $12/b discount in August that year. But the discount should remain wide enough to keep exports flowing.

New players arriving in Texas

The favorable economics of US crude producers, despite the recent price drop, continues to draw in even more players to the market.

Greenfield Midstream will set up shop in Houston following a $300 million injection from investment firm EnCap and Flatrock Energy Advisors.

“Our target will be development of natural gas and crude oil gathering, processing and compressing facilities in North America,” said Casey Nikoloric, spokesperson for Greenfield Midstream.

Also, Tall Oak Midstream said it has received $200 million in funding from EnCap and Flatrock to form a third midstream company.

To be called Tall Oak Midstream III, it will focus on all oil and gas plays in North America, except northwest the STACK play in Oklahoma.