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Harbor Island crude terminal project needs funding, pipelines after legal debate resolved


Port of Corpus Christi and city of Port Aransas resolved litigation

Financial backing needed after The Carlyle Group pulled out

Need for extra crude export capacity questioned

Houston — The lengthy legal fight for the Harbor Island crude export terminal was resolved amicably, but the Texas port project still requires more financial support, new pipelines and, perhaps most importantly, recovered global oil demand in order to ever move forward with construction.

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The Port of Corpus Christi and the tourist-friendly city of Port Aransas announced on Aug. 31 that they would settle their litigation, but Port CEO Sean Strawbridge acknowledged that a lot of pieces must still come together to make the Harbor Island project a reality even if he remains bullish on its long-term prospects.

In a Sept. 2 interview, Strawbridge said he's glad the port and the city are "finally aligned" on the project with city services now set to receive more funding from the port.

"The bigger question, of course, is are the economic conditions going to support development out there?" Strawbridge said. "I think eventually they will, but the economics are difficult at this point."

The Harbor Island project is designed to accommodate VLCCs at an island terminal, which would be a first in the US. The roughly $1 billion would export up to 2 million barrels of crude per vessel, which is about how much VLCCs can accommodate. Harbor Island also would include a desalination plant for crude oil processing.

Thus far, only one Gulf of Mexico port, Louisiana's LOOP, can fully load VLCCs without reverse lightering from smaller ships.

Dollars and pipes

Apart from pending permitting approvals from the state and the US Army Corps of Engineers to proceed with channel dredging, Strawbridge said another big financial backer is likely needed, as are at least two substantive pipeline projects to direct crude oil from the Cushing, Oklahoma storage hub to Corpus Christi. As it stands now, Corpus Christi, which emerged as the nation's top oil exporter late in 2019, exports crude almost entirely from the Permian Basin and South Texas' Eagle Ford Shale.

"Harbor Island absolutely makes sense with Cushing connections, but it's challenged otherwise," Strawbridge said.

Likewise, "We certainly would like to see a blue-chip player enter the space," Strawbridge said, in order to support the project with funding and industry expertise.

The big private equity player, The Carlyle Group, walked away from the Harbor Island project last year, leaving developer Lone Star Ports with a sole owner in the form of the smaller firm, The Berry Group.

As for pipelines, Strawbridge is still banking on the Phillips 66-led Red Oak Pipeline project, which was deferred indefinitely because of the coronavirus pandemic. Red Oak, owned by Phillips 66 and Plains All American Pipeline, would move 400,000 b/d, including Canadian and Bakken Shale grades of crude, from Cushing to multiple Texas port hubs in Houston, Corpus Christi and Beaumont.

Strawbridge said he also hopes another pipeline could at least be built to better connect Houston and Corpus Christi, moving barrels from Cushing through Houston, where he said there is more crude oil and pipeline congestion. Strawbridge mentioned EPIC Midstream as a potential pipeline builder.

Dating back to 2019, EPIC, Plains and Phillips 66 have all brought major crude pipelines online from the Permian to the Corpus Christi region -- the EPIC, Cactus II and Gray Oak pipelines. But, in the meantime, Moda Midstream, NuStar Energy, Buckeye Partners and others have notably built up their crude-exporting capabilities from Corpus just as US crude production has fallen from the global demand collapse triggered by the pandemic. Buckeye's new South Texas Gateway Terminal, for instance, just started shipping barrels in July.

"All the terminals at the Port of Corpus Christi have a competitive nature," Strawbridge said. "The question is will there be enough barrels to go around for everyone?"

Demand and permitting concerns

The need for the Harbor Island project was questioned even before the pandemic and now those doubts have grown.

The US exported 2.9 million b/d of crude on a four-week moving average the week ended Aug. 28, below the 4 million b/d level seen in mid-March, US Energy Information Administration data shows. And S&P Global Platts Analytics expects exports to fall to around 2 million b/d in 2021.

"There could be demand for VLCC terminals in the Gulf as they are more cost efficient for long trips to Asia, but not so much to Europe," said Ethan Bellamy, East Daley Capital's managing director of midstream strategy. "There are other VLCC projects that are likely cheaper and quicker to get done, as well as substantial excess export capacity."

Dredging and new pipeline construction add to the Harbor Island project costs, Bellamy said.

"The Capline [pipeline] reversal is going to be in-service sometime late this year and that should let LOOP ramp up their exports, which can fully load VLCCs," he said.

Many proposals to build deepwater, oil-exporting terminals also have fallen by the wayside both before and since the pandemic. Two front runners are delayed indefinitely but still pending: the Bluewater terminal project, led by Phillips 66 and Trafigura, that would be offshore of Corpus Christi; and Enterprise Products Partners' Sea Port Oil Terminal, called SPOT, that would be offshore of the Houston Ship Channel.

"If your long-term view on oil and gas exports is bullish, then I think all of these projects will make sense eventually," Strawbridge said. "People keep saying the port is competing with its customers. No. They're all our customers, and we don't pick winners and losers."

But, the port is still waiting on state and federal permitting. Those processes have been slowed, in part, for the same reasons as the litigation. Port Aransas, with a population of just about 4,000 people, features beaches, eco-tourism, wetlands, and recreational boating and fishing. As such, there's a lot of opposition to a major oil terminal bringing in VLCCs and ship traffic closer to their beaches and recreation.

Strawbridge acknowledges the public comments made in opposition, and he bemoans the so-called, "not in my backyard, NIMBY attitudes."

"We've been patiently waiting, and it's time," Strawbridge said of the prolonged permitting periods. "We're a friendly agency that wishes to cooperate. It will be responsible, safe and sustainable."