Crude loves Rock’n’Rail – Gulf Coast destinations – outside The Ship Channel

Sandy Fielden for RBN Energy

In the short term midstream companies with crude-by-rail unloading terminals at the Gulf Coast can deliver cheaper light sweet crudes from the Midwest and West Texas. Once new pipelines come online to deliver that crude direct to Houston that price advantage will disappear. At that point rail terminal operators need to diversify their business to survive. Today we look at the fate of Texas Gulf Coast rail terminal operators.

Previously on Crude Loves Rock’n’Rail…

The first episode in this crude by rail series provides an introduction and overview of the “Year of the Tank Car” (see Crude Loves Rocking Rail). We describe the rapid growth in US crude oil production that put pressure on pipeline logistics and made rail a viable alternative for moving crude to market. The second installment (see Crude Loves Rocking Rail – The Bakken Terminals) began our survey of rail loading terminals with a map and a complete list of facilities in North Dakota.  The follow up episodes covered EOG, Hess and Inergy, Plains, Enbridge and Global, Bakken Oil Express, Dakota Plains, BakkenLink and Savage and Bakken terminals north of the Canadian border in A Plethora of Terminals in the Williston Basin. We discussed the development of rail terminals loading heavy oil sands bitumen crude in Western Canada in two episodes Heat It! (Bitumen Economics Part 1) and Part 2. The last episode on rail loading covered terminals built outside the Bakken and Canada in the Niobrara, Eagle Ford, Permian and Anadarko basins as well as Cushing, OK (see Load Terminal Craze). This is episode four in our survey of rail destination terminals with the first three covering the East (see East Coast Delivery Terminals) West (see West Coast Destinations) and Eastern Gulf (see The Bakken St James Shuttle) Coasts respectively.

Crude-by-Rail Housekeeping

The complete series can be found at the www.rbnenergy.com website under the Daily Energy Post tab. This is the second of two back-to-back episodes continuing our survey of destination terminals in the Gulf Coast region West of the Mississippi. You can find the first of these two episodes here. This time we also cover a refinery in Kansas with rail unloading facilities that is not in the Gulf Coast region but deservse a mention somewhere.

Thanks to all those members that sent in omissions and corrections to previous episodes as well as useful additional information on railroads and terminals. Keep them coming. We will provide you with updates going forward.

Beaumont/ Port Arthur

Beaumont and Port Arthur are located on the Texas side of the Louisiana border close to the Gulf of Mexico along the Sabine waterway and Sabine Neches ship channel (see Nederland Crude Wonderland for a map). There is a cluster of major refineries in this region – connected by water and pipeline to Houston and St James, LA. Two purpose built rail to barge unloading and storage terminals have been constructed – one each in Port Arthur and Beaumont.

The GT Omniport, Port Arthur, TX crude-to-barge rail unloading facility is owned and operated by GT Logistics LLC (mentioned previously in our Terminal Operators series). Omniport has been up and running since August 2012. The terminal can currently offload 100 Mb/d with a storage track capable of holding up to 250 rail cars expandable to over 1000 rail cars on final completion. Railroad connectivity is direct to BNSF or UP. Crude is unloaded onto a multi barge receiving dock for redelivery to area refineries. Omniport are developing storage facilities to increase the flexibility of the facility.

Kansas City Southern (KCS) railroad are (according to their latest earnings call April 19, 2013) in negotiation with a potential partner to develop a unit train unloading and storage terminal on property that KCS owns in Port Arthur. KCS do not identify their partner or details on timing, volumes or revenues.

Jefferson Refinery have built a rail unloading terminal at the Port of Beaumont Orange County Dock that will commence operation next month (May 2013). Crude will be unloaded onto barges then moved down the Sabine Neches Ship Channel to local refineries. The railroad access is via Kansas City Southern (KCS) who are building new switch track and signalization to improve access to the Port of Beaumont. At capacity the terminal will be able to offload 65-70 Mb/d of crude oil via 120 unloading stations. Jefferson also plans to build storage capacity and pipeline links to the ExxonMobil Beaumont refinery (365 Mb/d) and Oiltanking Beaumont Storage. Incoming crude oil will come from the Eagle Ford, Bakken and Western Canada.

Mont Belvieu

The Keyera rail unloading and storage terminal at Hull, TX is connected by pipeline to ExxonMobil's Beaumont refinery complex, the Daisetta storage facility, and natural gas liquid (NGL) facilities in the Mont Belvieu hub (see Can Mont Belvieu Handle the NGL Surge). Keyera primarily provides NGL infrastructure and transportation inside Canada but they purchased and are refurbishing this Texas facility to potentially handle rail deliveries of Canadian dilbit crude oil into the Houston area and to deliver condensate back to Western Canada (see Fifty Shades of Eh?). The terminal should be operational by the end of June 2013.

Corpus Christi

We covered the marine terminals in Corpus Christi a couple of months back (see We’re Jammin’). Most of these terminals are designed to receive and store pipeline delivered crude oil or condensate from the South Texas Eagle Ford basin. Crude and condensate are then transferred to barges for onward delivery to Gulf Coast refineries or to marine vessels for shipment to East Coast refineries. Condensate is also being sent by barge to St. James, LA for onward shipment on the Capline and Southern Lights pipelines to Western Canada as diluent. One of the Corpus marine terminals, the Trafigura owned Texas Dock and Rail Company has a rail unloading facility that is currently handling at least 30 Mb/d delivered via BNSF or UP.

Refineries

Three refineries in the region west of the Mississippi and east of the Rockies are receiving or plan to receive crude directly by rail from dedicated facilities. The first is the    80 Mb/d Delek El Dorado, AR refinery that adopted crude by rail to help offset the loss of supplies from a leaking Exxon (North Line) pipeline shut down in April 2012. Delek is expanding its private rail unloading terminal to handle up to 25 Mb/d of light crude and 12 Mb/d of heavy Canadian bitumen by the end of June 2013. Second is the 135 Mb/d Holly Frontier refinery in El Dorado, KS that is served by the El Dorado Railport developed for them by Savage Services that also supplies Delek with up to 20 Mb/d. Railroad access is from BNSF and UP. Holly Frontier are also developing a crude-by-rail unloading terminal to serve their 100 Mb/d Navajo refinery in Artesia, NM. The terminal will have unit train 70 Mb/d unload capacity and be served by BNSF via the Southwestern short railroad. Expected in operation by early 2014.

 

Commentary

As we pointed out in yesterday’s episode, rail-unloading terminals in the Texas Gulf Coast region face a tougher market environment once pipelines are completed that will compete for their business. Since 1.7 MMb/d of incremental crude is expected to arrive in the region via new pipelines by the end of 2014 that is going to happen sooner rather than later. Since rail transportation is more expensive than pipeline, producers are generally expected to prefer pipelines to get their crude to Gulf Coast refineries. [The exception to this expected outcome is the market for heavy crude that we will discuss separately in a minute]. Companies like GT Omniport and Jefferson Refining that have built crude by rail receiving terminals at Port Arthur and Beaumont primarily to handle light sweet crude from US production basins may therefore need to diversify their business to compete in the long term.

Short term these light sweet crude unloading facilities retain a clear advantage while the market waits for the new pipelines to be completed. That is because crude price differentials between “stranded” inland crudes in the Midwest or West Texas and higher priced crudes at the Gulf Coast more than justify the cost of rail transportation. And after the pipelines are up and running the new logistics will take a while to untangle as well – providing continued opportunities for crude by rail to offer competitively priced crudes delivered direct to refineries. The example of the Seaway pipeline from Cushing, OK to Houston – apparently constrained earlier this year (2013) by a lack of storage and connectivity at the Houston end – is a case in point. Delivering crude by rail can by-pass any such traffic congestion into the region.  

But sooner or later new pipeline distribution wrinkles will be ironed out. At that point we expect Gulf Coast refiners to be over supplied with light sweet crude oil (see After The Flood). The oversupply will be caused by new light sweet shale oil production exceeding refinery demand at the Gulf Coast. Since crude exports are not permitted (except to Canada) the oversupply will cause pricing discounts. Effectively the situation in the Midwest over the past two years where crude supply has exceeded refining capacity causing price discounting will transfer to the Gulf Coast. In this scenario prices for light sweet crude at the Gulf Coast will no longer exceed prices in the Midwest by any amount greater than the pipeline transport cost from Cushing to Houston. That will make barrels transported to the Gulf Coast by rail more expensive because rail costs are higher than pipeline tariffs.

We suggested in yesterday’s episode on the Ship Channel that trading companies like Mercuria – who are the committed shipper for the KW Express rail-unloading terminal at Greens Port in the HSC – will continue to profit from crude price differentials around the US. Such differentials are likely to arise from time to time as crude production exceeds pipeline capacity or during pipeline outages in one or more producing regions. Savvy traders like Mercuria will then be able to snap up “distressed” production barrels at a discount and deliver them direct to refiners on the Gulf Coast by rail. But these trading activities assume speculative price risk during transportation. That business is different to the third party logistics model that GT Omniport and Jefferson Refining are reported to be using to run their crude-by-rail terminals.

An exception to the above conclusions regarding light sweet crude is the picture for heavy Canadian bitumen crude. Refinery demand in the Gulf Coast region as a whole for heavy crude is about 3.3 MMb/d with more than fifty percent at Texas Gulf Coast area refineries. Most of that demand is currently met by imports. Assuming it finally gets approved, the Keystone XL pipeline will bring 830 Mb/d of Canadian crude to Port Arthur in 2015. However not all of that crude will be heavy. An opportunity therefore exists to continue shipments of heavy Canadian crude by rail until more pipeline capacity is added to the Texas Gulf Coast. KCS have stated that their proposed crude-by-rail unloading project at Port Arthur will be dedicated to delivering heavy Canadian crude. Adding weight to that business case we received a note this morning from Houston Fuel Oil Terminal (HFTCO) located in the Ship Channel who let us know that they are already handling manifest shipments of heavy Canadian crude and have 50 active rail spots with heating equipment. As we have discussed previously there are advantages to transporting heavy bitumen crude by rail versus pipeline because of the savings afforded by not needing diluent to make the crude flow (see Heat It! Bitumen by Rail). The likely constraint for heavy Canadian crude will be a lack of crude loading capacity in Alberta.

So companies like GT Omniport and Jefferson refining will have to expand the functionality of their crude-by-rail terminals to offer additional services – including the capability to handle bitumen crude from Western Canada. Rail unloading facilities can also be adapted to distribute refined products or NGLs.  GT Omniport is already building storage and has plans to expand their service to refined products and NGLs. Jefferson Refining has other assets outside the Ship Channel such as a small processing facility at Winnie, TX that they plan to connect to their Beaumont terminal. The key to survival as always – will be adaptability.

Meantime refiners like Holly Frontier and Delek have provided themselves with optionality by planning and building rail-unloading capacity. Rail facilities reduce their dependence on pipelines and provide access to a wider range of crude – including Canadian heavy – delivered to their doorstep by rail. In any case these terminals can also be put to other good uses like refined product distribution.

That concludes our survey of crude by rail loading and offloading facilities. In the next episode we will start to connect the dots between these terminals and look at how crude pricing differentials and rail transport costs dictate the destinations that shippers choose.

 

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