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January 8, 2013 4:47 pm
Resurgent North American oil production is stoking conflict along pipelines in the region as customers jockey over space and operators seek higher fees.
The outcome could influence profit margins for US refineries buying oil from boom states such as North Dakota and affect the nearly $20-a-barrel gap between the world’s two most important crude benchmarks – Brent and West Texas Intermediate.
This could help drain record stocks at Cushing, which have depressed US oil prices.
But even as flows quicken to 400,000 barrels a day, Seaway’s owners are embroiled in a legal dispute over whether it should be able to abandon regulated shipping rates of $2-$3.50 a barrel and charge customers what the market will bear.
WTI crude delivered to Cushing was $92.88 a barrel on Tuesday, an $18.80 discount to the Brent benchmark.
If the Seaway pipeline’s owners increased transport costs, shippers that have not committed to long-term capacity would need a larger discount to make increased volumes worthwhile.
“If the pipeline tariff ends up being higher than what people are assuming, it strongly implies that the discount will be wider,” said Michael Wittner, head of oil research at Société Générale in New York.
The Federal Energy Regulatory Commission, a US agency overseeing interstate oil pipeline tariffs, at first denied a request to let Seaway become the second crude pipeline in the country to charge market rates for transport.
With competition limited, most pipelines are treated like utilities and permitted modest price increases.
“Seaway’s origin and destination markets are shown to be highly competitive,” the companies said in a filing.
As oil production rebounds, drillers and refiners have turned to trains, barges and trucks to move oil from remote fields to refineries but all are more expensive than pipelines.
The Association of Oil Pipe Lines said new US pipeline capacity totalling 500,000 b/d came into operation last year. US crude output rose 780,000 b/d last year, the government estimates.
“Production has increased faster than the pipeline infrastructure has come online,” said Andy Lipow, a Houston oil consultant.
In another case before the commission, PBF Energy complained that Enbridge crimps volumes of the “light” crude that its Ohio state refinery needs to make room on a pipeline for the viscous “heavy” crude used by rival refineries in the US midwest.
PBF accused Enbridge of “preferential and discriminatory apportionment” in a filing to the commission.
In a response to FERC, Enbridge said it “applies a consistent, reasonable and even-handed approach to pro-rationing of its complex system that favours neither light nor heavy crude shippers”. It said the company is adding pipeline capacity aimed at Ohio.
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