Permian Basin takeaway constraints may draw today’s headlines, but the next potential challenge could be opening the spigot on the Gulf Coast for more U.S. crude exports, Raymond James & Associates said Monday.
Because the U.S. refining system overall is set up to run large amounts of heavy sour crude, and shale/tight formations mostly produce light sweet oil, the industry has no choice but to expand exports, said analysts Justin Jenkins and J.R. Weston.
“We have already seen exports increase meaningfully since last summer, and that ramp will only continue over the next decade,” analysts said.
Given the expected growth in Gulf Coast oil exports, some bottlenecks are likely to emerge.
Year-to-date through July, domestic oil exports surged 50% from 2017 to an average of more than 1.8 million b/d.
“Incredibly, the U.S. has exported a whopping 2 million b/d-plus over the past three months,” analysts wrote. “This compares to an average of 1.2 million b/d in 2017 and represents a huge structural shift to the global oil market in the wake of the shale revolution and lifting of the oil export ban in December 2015.”
Analysts expect the recent trend to continue as discounts for U.S. crude and production growth from capacity constraints lead to more exports. Over the next 12-18 months, “we may well need to push exports to 4 million b/d-plus, simply to keep pace with U.S. production growth.”
Based on the firm’s proprietary production-by-play model, the overall U.S.-average 2018 crude production volumes should increase 1.4 million b/d year/year (y/y), leading to an exit rate of 11.2 million b/d this year. For 2019, y/y growth is modeled at 1.2 million b/d, implying December 2019 production reaches 12.4 million b/d.
“Given that effectively all of this production growth is of the light sweet variety (and minimal near-term refining capacity additions), we believe that almost all incremental supply added over the coming years will need to be exported into the global market,” analysts said. Domestic exports “are likely to be solidly above 4 million b/d by the end of 2020.”
While there may be “sporadic, temporary bottlenecks, particularly in certain locations,” overall, the industry should be able to accommodate export growth in the coming years, said analysts.
Operators are stepping up plans to build loading capacity and docks along the Gulf Coast, particularly in South Texas near Corpus Christi, but it’s not as efficient as it could be.
Only one existing export point along the Gulf Coast, the Louisiana Offshore Oil Port, or LOOP, now can accommodate very large crude carriers (VLCC), which can hold 2 million bbl of crude per shipment. To allow VLCCs at other ports, deeper waterways need to be dredged or pipelines constructed to offshore terminals.
The Port of Corpus Christi Authority has a feasibility study underway regarding VLCCs without reverse lightering, which now is done on Harbor Island at the end of the Corpus Christi Ship Channel. The junction at Redfish Bay and the Gulf of Mexico also could be developed to store 20 million bbl of oil and for blending.
Once the oil export capacity issue is alleviated, there are some concerns that export risks could be heightened because of trade tensions with China. However, because oil is a highly fungible product, someone will buy it at the right price, analysts noted.
“That said, we believe trade relations will improve over time, and Chinese refiners are likely to increase purchases of U.S. crude in the medium term.”
By the end of next year, some Permian oil pipelines are to begin shipping directly to the Corpus Christi market in South Texas, where current refining capacity is 800,000 b/d. While there likely is spare capacity now for exports from Corpus and the nearby Ingleside terminal, “there may be some long-term growing pains for Corpus exports.
“This could potentially lead to a moderate discount over time for barrels priced in Corpus Christi versus other Gulf Coast hubs (e.g., Houston)...The ‘congestion’ question related to Houston still matters, but given a larger refinery demand base, we’d expect this market to hold up well over time. Further east of Houston, the Beaumont area likely continues to grow export capabilities, and the story is likely similar into Port Arthur and further east into Louisiana -- setting up many end markets for U.S. consumption or exports.”