Can Houston refineries absorb new Permian crude supplies?

Sandy Fielden, RBN Energy

Permian crude production is set to increase 0.4 MMb/d to 1.8 MMb/d by December 2018 (Bentek). New pipeline capacity currently being built and planned to be in place by the end of 2015 should comfortably handle the output by then – primarily pushing Permian crude into the Houston market. The bigger question is whether Houston region Gulf Coast refineries can process the new crude without significant reconfiguration. Today we review whether Gulf Coast refiners can handle incoming Permian production.

Previously in this series on the Permian Basin we looked at crude production, existing pipeline takeaway capacity and local refinery consumption (see Rock The Basin – A Tight Pipeline Balance For Permian Crude). In Part 2 we looked at new pipeline capacity coming online in the next two years out of the Permian and compared it to the production forecast (see Opening the Permian Crude Floodgate). Although production and takeaway capacity are currently tightly balanced at 1.4 MMb/d, congestion should be eased by the end of 2013. In this episode we look at where the new pipelines out of the Permian are delivering crude and whether adequate refining capacity is available at those locations.

As we described earlier in the series there is now at least 75 Mb/d and probably closer to 90 Mb/d of crude takeaway capacity from the Permian available on the reversed Longhorn pipeline. That capacity will expand through the end of 2013 to 225 Mb/d. The Longhorn ships crude from Crane in the Permian Basin to the Magellan East Houston terminal on the Texas Gulf Coast. The East Houston terminal offers direct pipeline access to Houston Ship Channel (HSC) and Texas City refineries. The East Houston terminal is also the origination terminal for Shell’s Ho-Ho pipeline with 200 Mb/d capacity to Port Arthur (see Oh-Ho-Ho It’s Magic). Upon completion (currently projected for the end of 2013) the Ho-Ho reversal project will extend from East Houston across the Gulf Coast to St James, LA. At the moment Ho-Ho extends as far as Port Arthur and provides access to Beaumont and Port Arthur refineries as well as the Exxon Baytown refinery. Don’t worry if you can’t keep track of all these refineries -- we have tables lower down to summarize.

Also opening up from the Permian basin are extensions to the West Texas Gulf (WTG) pipeline operated by Energy Transfer Partners affiliate Sunoco Logistics. The main leg of the WTG pipeline comes south from Longview, TX into Sunoco’s Nederland Terminal - about 100 miles East of Houston and 350 miles West of New Orleans. Nederland is located on the Sabine-Neches waterway between Beaumont and Port Arthur, Texas (see Nederland Crude Wonderland). The Sabine River connects to the Gulf of Mexico, providing waterborne access to the entire Gulf Coast region. The expansion of the WTG was supposed to have provided 40 Mb/d of capacity from Longview to Nederland by early 2013 but the final leg of the project uses the ExxonMobil Pegasus pipeline that has been out of service since a rupture in Arkansas in April of this year. However Phase 1 of Sunoco’s Permian Express pipeline that runs from Wichita Falls, TX to Nederland has recently opened. Permian phase 1 has 90 Mb/d capacity to transport Permian crude via a connection with the Basin pipeline in the Texas Panhandle.

The smaller Kilgore Pipeline leg of the WTG pipeline travels further west from Longview into the Houston Oiltanking (OTI) terminal on the HSC (see Crude Accommodation at the Oiltank Inn). The Kilgore delivers 40 Mb/d of Permian crude into Houston area refineries connected to OTI as well as dock access to Louisiana refineries. Between them all of these pipelines into the Houston and Port Arthur regions have current capacity of 220 Mb/d rising to 355 Mb/d by the end of 2013. Another 40 Mb/d of capacity will open up when Pegasus comes back online (ExxonMobil has fixed the rupture but awaits new permits). Phase 2 of the Permian Express will also come online in Mid 2014 to add another 200 Mb/d. For the moment though we have approximately 220 Mb/d of Permian crude looking for a home in the Houston/Port Arthur region.

Refinery capacity in the Houston region is spread between the HSC, Pasadena, Galveston and Texas City. The table below summarizes the existing refineries, locations and nameplate capacities. The two columns on the right of the table are estimates of the type of crude processing capacity at each refinery based on company websites. Permian crudes are either West Texas Intermediate (WTI) that has a typical API gravity of 38-40 degrees with a sulfur content of 0.3 percent – making it a light sweet crude and West Texas Sour (WTS) that has an API gravity of 32.8 degrees and a sulfur content of 1.98 percent – making it a light sour crude. The Houston region refineries have total nameplate capacity of 2.25 MMb/d approximately two thirds of which (1.5 MMb/d) is heavy crude and 750 Mb/d is light or medium crude capacity.


Source: Company Websites

Nameplate refinery capacity in the Port Arthur/Beaumont region is about 1.5 MMb/d at four refineries including the 600 Mb/d Motiva refinery – the largest in the US. The table below summarizes Port Arthur/Beaumont refining capacity in the same way we did for the Houston region above. This time the only difference is that none of the four refineries is specifically designed to run light sweet crude – the Valero and Total refineries run heavy crude exclusively. The Motiva and ExxonMobil Beaumont refinery are designed to run heavy crude but can handle medium and light crudes as well. We estimate that ExxonMobil and Motiva between them may be able to use up to two thirds of their capacity (~640 Mb/d) to process light and medium crude.

 

Source: Company Websites

Our estimates of refinery capacity to process Permian crudes add up to about 1.4 MMb/d that could potentially be available. With only about 220 Mb/d of Permian crude looking for a home in the region right now it would appear very likely that this can be absorbed by Texas Gulf Coast refineries. However Permian barrels are also competing for this refinery space with Eagle Ford shale crude from South Texas as well as light sweet crude travelling to Houston from the Midwest on the Seaway pipeline. Last month we looked at barge movements of Eagle Ford crude from Corpus Christi along the Gulf Coast and noted exports from Corpus at 300 Mb/d (see Sittin’ On the Dock of the Bay). In that blog we showed Clipper data that logged an average of 200 Mb/d of Eagle Ford crude coming into Houston and Port Arthur. We also estimated that Enterprise and Kinder Morgan pipelines into Houston were 50 Percent full – another 300 Mb/d – with half that amount being condensate destined for the Canadian market. That leaves 150 Mb/d going to Houston area refineries. The 400 Mb/d Seaway pipeline out of Cushing, OK down to Houston (Jones Creek) has been running at half full (200 Mb/d) since January due to constraints at the Houston end (see Brent/WTI Reconciliation Dreams Shattered). We estimate that half that capacity is used to carry light crude, meaning another 100 Mb/d heading into the Houston mix. To sum up:

Light Sweet Crude Supply into Houston/Beaumont/Port Arthur region:

Permian pipelines 220 Mb/d
Eagle Ford pipelines 150 Mb/d
Eagle Ford Waterborne 200 Mb/d
Seaway pipeline 100 Mb/d
Total Crude Supply 670 Mb/d 
Total Refinery Demand 1.4 MMb/

On balance our analysis therefore suggests that Houston/Beaumont/Port Arthur region refineries should easily be able to absorb the current light sweet crude coming out of the Permian Basin by replacing imported light sweet or medium crudes that they are currently processing. Anecdotal and pricing evidence however suggest that light sweet shale crude is over supplied into Houston area refineries today. And that is where we will take this analysis in the next episode – to look at whether regional refineries are likely to actually be replacing imports – especially those owned by crude producing nations such as Saudi Arabia and Mexico. We will also look at the effect on this equation of future pipeline capacity growth into Houston.

 

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