?
Houston Lateral Thinking Lacks Canadian Barrels
New TransCanada pipeline from Cushing to Houston faces uphill
challenge.
Morningstar Commodities Research
Aug. 1, 2016
New Pipeline Lacks Canadian Supplies
TransCanada's new Houston Lateral pipeline comes on line this month to deliver crude from Cushing,
Oklahoma, to Houston. The pipeline is an extension of the Cushing Marketlink that represents the
Sandy Fielden
Director, Oil and Products Research
+1 512-431-8044
[email protected]
southern leg of the proposed Keystone XL pipeline that was expected to deliver heavy crude from
western Canada to the Gulf Coast. Since the U.S. denied the Keystone XL pipeline a presidential permit
in November 2015, shippers on the southern leg are hard-pressed to source Canadian heavy crude. That
constraint undermines the purpose of the Houston Lateral—leaving committed shippers likely delivering
light sweet barrels into a Houston market already saturated with light shale crude.
Market Impact
We expect the new pipeline to be bearish for Houston crude prices in an already saturated market
where light sweet crude has averaged just $1.44 per barrel over Cushing this year despite the $4/barrel
Seaway tariff.
The process of filling the new lateral with crude will be bullish for Cushing inventory draws in the next
month. Demand for crude to ship on the new lateral will also be bullish for prices although with
inventory in Cushing still close to record levels there is no danger of any shortage of supplies.
Houston Lateral
The Houston Lateral pipeline runs 46 miles from Liberty, Texas, to the Moore Road terminal in Houston
and provides shippers on the existing 700 thousand barrels/day, or mb/d TransCanada Cushing
Marketlink pipeline between Cushing and Nederland, Texas, with the option of a delivery point
connected to 2.7 million barrels/day of refining capacity in the Houston area. The Cushing Marketlink
(completed in 2014) and the Houston Lateral together form the southern leg of the ill-fated 830 mb/d
TransCanada Keystone XL pipeline. That pipeline was supposed to run all the way from Hardisty,
Alberta, to the Gulf Coast. The northern part of the system, from Hardisty to Cushing, has not been
completed because it was denied a presidential permit to cross the U.S. border in November 2015. The
original 590 mb/d Keystone Pipeline, on line since 2010, runs from Hardisty to Steele City, Nebraska, and
then branches to Patoka, Illinois, and Cushing. The Houston Lateral will carry both light and heavy crude
and has the same 700 mb/d capacity as the Cushing-Nederland line.
A TransCanada storage terminal at the Houston end of the new lateral has 700,000 barrels of storage
capacity and is already linked to Enterprise Product Partners' Houston Ship Channel pipeline network.
TransCanada and Magellan Midstream Partners are currently constructing a 9-mile pipeline linking the
TransCanada Houston terminal to Magellan’s East Houston terminal and crude distribution network that
Page 2 of 6
Houston Lateral Thinking | 1 August 2016
Page 2 of 6
Healthcare Observer | 1 August 2016
Page 2 of 6
Paper Title | 1 August 2016
Page 2 of 6
Healthcare Observer | 1 August 2016
is expected on line in the first quarter of 2017. The initial tariff for uncommitted shippers on the
TransCanada system delivering light crude from Hardisty to Houston will be $7.113/barrel and for heavy
crude $7.730/barrel, the same price as deliveries to Nederland. The initial tariff between Cushing and
Houston is a special discount rate of $2.50/barrel for light crude and $3/barrel for heavy crude.
Current Crude Flows Into Houston
The Houston Lateral comes on line just as the infrastructure building frenzy resulting from the oil shale
production boom between 2011 and 2015 is winding down in the face of lower prices and production.
During the boom, 2.2 mmb/d of new pipeline capacity came online into Houston from the South Texas
Eagle Ford Basin, the West Texas Permian Basin, and from Cushing. Another 900 mb/d of pipeline
capacity already delivered offshore Gulf of Mexico and legacy South Texas crude production to the
Houston area. In addition to all that domestic crude, Energy Information Administration data indicates
that Houston imported just over 1 mmb/d of crude on average this year—much of it delivered from the
water. All these numbers add up to about 4 mmb/d of existing crude delivery infrastructure into the
Houston region. As detailed in Exhibit 1, the area’s 11 refineries and processing plants can only process
a nameplate 2.7 mmb/d, meaning that the Houston market is already saturated with crude. That reality
sets the bar pretty high for TransCanada’s committed shippers to find a home for up to 700 mb/d of new
barrels in the short term.
Exhibit 1 Houston Refining Capacity
Source: Morningstar
Scarce Canadian Barrels
TransCanada’s original intent was to provide Keystone XL shippers with ready access to Houston-area
refineries configured to process heavy crude from western Canada. As we detailed in May (see Western
Canadian Wildfires), the heavy bitumen crude produced in Alberta has to be diluted with lighter
hydrocarbon diluents to flow in pipelines. Although crude prices have fallen by more than 50% in the
past two years, Canadian crude production from the oil sands region continues to grow as a result of
Page 3 of 6
Houston Lateral Thinking | 1 August 2016
Page 3 of 6
Healthcare Observer | 1 August 2016
Page 3 of 6
Paper Title | 1 August 2016
Page 3 of 6
Healthcare Observer | 1 August 2016
investments made before the crash. A June 2016 Canadian Association of Petroleum Producers report1
forecasts Canadian crude production growing by 540 mb/d, or 14%, from 2015 to 2020, with the majority
of that growth being heavy crude. The principal target market for this new crude is the U.S. Gulf Coast,
home to the world’s largest concentration of complex refineries that have coking units to break down
heavy crude into lighter refined products. As indicated in Exhibit 1, the six largest Houston-area
refineries boast coking capacity.
Therefore, in spite of the flood of light shale crude from Texas and Cushing that has descended on
Houston via new pipelines since 2013, a large part of local demand uses heavy crude, and these plants
have difficulty processing lighter, more volatile, shale crude (see our July note Gulf Coast Refiners
Penalized). Most of Houston refiners' heavy crude is currently supplied by imports from Latin America.
Exhibit 2 shows the makeup of crude imports supplied to Houston refineries since January 2009
according to the EIA. Over this period, light crude imports declined from an average 327 mb/d in 2009 to
just 5 mb/d in 2016 through May—pushed out by surging domestic supplies from shale. Medium crude
supplies declined 35% from an average 444 mb/d in 2009 to 287 mb/d so far in 2016. Heavy crude
imports have been more resilient, falling only about 14% from 868 mb/d in 2009 to 748 mb/d in 2016
through May. Some of these heavy crude imports (an average of about 154 mb/d in 2016) came from
Canada (black line on the chart)–delivered via the Enbridge/Enterprise joint venture Seaway pipeline
and by rail. The rest are mostly from Mexico, Venezuela, and Colombia as well as the Middle East. These
heavy crude imports are the incumbent supplies that Canadian producers are looking to displace. If the
Keystone XL pipeline had been built, then the Houston Lateral would have been a “go-to” route to
Houston for western Canadian barrels. However, in the absence of the Keystone XL conduit from
Canada, the utility of the TransCanada Houston Lateral is questionable in the short term.
1 Crude Oil Forecast, Markets and Transportation, June 2016 CAPP http://www.capp.ca/~/media/capp/customer-portal/publications/284950.pdf
Page 4 of 6
Houston Lateral Thinking | 1 August 2016
Page 4 of 6
Healthcare Observer | 1 August 2016
Page 4 of 6
Paper Title | 1 August 2016
Page 4 of 6
Healthcare Observer | 1 August 2016
Exhibit 2 Crude Imports to Houston Refineries
Light
Medium
Heavy
Canadian
2500
thousand b/d
2000
1500
1000
4/1/2016
10/1/…
1/1/2016
7/1/2015
4/1/2015
10/1/…
1/1/2015
7/1/2014
4/1/2014
10/1/…
1/1/2014
7/1/2013
4/1/2013
10/1/…
1/1/2013
7/1/2012
4/1/2012
10/1/…
1/1/2012
7/1/2011
4/1/2011
10/1/…
1/1/2011
7/1/2010
4/1/2010
10/1/…
7/1/2009
4/1/2009
1/1/2009
0
1/1/2010
500
Source: EIA
The principal challenge for TransCanada shippers hoping to deliver growing heavy Canadian crude to
Houston is a shortage of supplies coming across the U.S. Canada border due to a lack of pipeline
capacity. The denial of the Keystone XL permit clearly stymies TransCanada from delivering incremental
Canadian barrels to Cushing for onward delivery to Nederland or Houston via the Cushing Marketlink.
Although the original Keystone pipeline can deliver up to 590 mb/d to Cushing from Hardisty, most of
these barrels have been absorbed by Midwestern refineries since that pipeline came on line in 2010. The
larger, rival Enbridge mainline and Lakehead pipeline system out of western Canada can deliver nearly
800 mb/d of Canadian crude to Cushing via the Flanagan South and Spearhead South pipelines, but
these volumes are encouraged to move to Houston on the Enbridge/Enterprise Seaway system rather
than to change horses in Cushing onto TransCanada’s pipeline.
In any case, continued pipeline congestion across the U.S. border restricts either Enbridge or
TransCanada delivering more barrels to the Gulf Coast, causing continued price discounting for
Canadian crude versus equivalent grades in the U.S. Evidence of this constraint can also be found in the
EIA import data. As we said earlier, an average of only about 154 mb/d of Canadian crude is reaching
Houston refineries in 2016, even though the Seaway pipeline capacity from Cushing to Houston is 850
mb/d with at least 450 mb/d dedicated to heavy crude. Likewise, the 700 mb/d TransCanada pipeline
from Cushing to Nederland has facilitated little penetration of the Nederland-area refining market by
Canadian barrels since coming on line at the end of 2014. The four Nederland-area refineries (Valero,
ExxonMobil, Total, and Motiva) have over 1.4 mmb/d of capacity and imported an average 359 mb/d of
heavy crude between January and May 2016. Canadian barrels represented just 16 mb/d of those
imports on average in 2014 before the TransCanada pipeline came on line but that number only
increased to 35 mb/d in 2016 through May.
Page 5 of 6
Houston Lateral Thinking | 1 August 2016
Page 5 of 6
Healthcare Observer | 1 August 2016
Page 5 of 6
Paper Title | 1 August 2016
Page 5 of 6
Healthcare Observer | 1 August 2016
The dearth of new heavy crude supplies from Canada coming into Cushing is expected to continue
through at least 2019 when Enbridge brings its Line 1 replacement on line to add 300 mb/d of capacity
across the border. The best hope for TransCanada is a new presidential permit for the Keystone XL after
the 2016 election.
Until new heavy crude supplies from Canada materialize, committed TransCanada Cushing Marketlink
shippers have had little choice but to move light sweet domestic crude to Nederland. Shipping light
crude to Nederland from Cushing has made sense and contributed to the Cushing Marketlink pipeline’s
success. There is no other direct pipeline link between Cushing and Nederland and the latter has been
the load point for a number of export cargoes of U.S. light crude since the export ban was lifted in
December 2015. The attractiveness of the Houston Lateral for light crude shippers is another matter
however. As we have detailed, Houston is already saturated with light sweet crude—from the Permian
and the Eagle Ford. In addition, the Seaway pipeline already has more than adequate capacity between
Cushing and Houston. In the circumstances, we expect some heated competition between TransCanada
and Seaway’s owners on this route, as indicated by TransCanada’s special discount tariff rate of
$2.50/barrel for uncommitted light crude shippers. That compares favorably with the current Seaway
walk-up tariff of $4/barrel for light crude. The lower rate should encourage some shippers to move crude
onto TransCanada in Cushing. K
Page 6 of 6
Houston Lateral Thinking | 1 August 2016
Page 6 of 6
Healthcare Observer | 1 August 2016
Page 6 of 6
Paper Title | 1 August 2016
Page 6 of 6
Healthcare Observer | 1 August 2016
About Morningstar® Commodities Research™
Morningstar Commodities Research provides independent, fundamental research differentiated by a
consistent focus on the competitive dynamics in worldwide commodities markets. This joint effort
between Morningstar's Research and Commodities & Energy groups leverages the expertise of
Morningstar's 23 energy, utilities, basic materials, and commodities analysts as well as Morningstar's
extensive data platform. Morningstar Commodities Research initially will focus on North American
power and natural gas markets with plans to expand coverage of other markets worldwide.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe,
Australia, and Asia. The company offers an extensive line of products and services for individuals,
financial advisors, and institutions. Morningstar's Commodities & Energy group provides superior quality
market data and analytical products for energy data management systems, financial and agricultural
data management, historical analysis, trading, risk management, and forecasting.
For More Information
+1 800 546-9646 North America
+44 20 3194 1455 Europe
[email protected]
?
22 West Washington Street
Chicago, IL 60602 USA
©2016 Morningstar. All Rights Reserved. Morningstar's Credit Ratings & Research is produced and offered by Morningstar, Inc.,
which is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating
Organization ("NRSRO"). Unless otherwise provided in a separate agreement, you may use this report only in the country in which
its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice;
are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be
correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except
as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting
from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary
property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent
of Morningstar. To license the research, call +1 312-696-6869.