Capline Reversal Could Catalyze Midstream Reshuffle

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The imminent reversal of the Capline oil pipeline carries the potential to rearrange oil flows across North America. The Capline originally carried imported crude oil from the US Gulf Coast to refiners in the Midcontinent. In the wake of the US shale revolution, utilization dropped precipitously as domestic and Canadian barrels displaced waterborne imports. As a result, the consortium that runs Capline -- Marathon Petroleum, Plains All American and BP -- decided to reverse flows on the line. Starting in January 2022, the Capline will carry crude from Patoka, Illinois to St. James, Louisiana (OD Mar.9'21). A reversed Capline will be able to displace waterborne volumes of heavy crude on the eastern Gulf Coast, furthering the emergence of North America as an insular petroleum trading bloc and boosting regional self-sufficiency. The reversal could also allow for more US exports and higher re-export volumes of Canadian crude from the Gulf Coast. Volumes and Timelines Line-fill for Capline is likely to start in the fall, but crude flows won’t begin until early next year. Initial volumes should be modest: analytics consultancy RBN Energy estimates 100,000-150,000 barrels per day initially, while several experts including RBN and Lipow Oil Associates see the scope for volumes to climb to 600,000 b/d in the years afterward based on the diameter of the pipe. Until recently, Marathon Petroleum and others had planned for the Capline to absorb flows from the Midcontinent via the Byhalia connection project near Memphis. However, that project has since been canceled (OD May5'21). Home Sour Home Experts say they expect the reversed Capline to carry mostly heavy, sour Canadian crude sourced from the oil sands. This crude grade must be processed in complex refineries such as those on the US Gulf Coast, making the region the premium market for benchmark Western Canadian Select (WCS) and other Canadian barrels. The US currently imports almost 4 million b/d of Canadian crude, but most of this is consumed in the Midcontinent -- where, alongside domestic feedstock, it accounts for virtually all oil supply -- or in refineries in Texas. With existing infrastructure, in order to reach the eastern Gulf Coast, Canadian barrels must travel via a ladder of pipelines to Texas and then go to Louisiana, or be shipped via rail, which is more expensive. With a more direct route from Patoka, a major Midcontinent hub where several pipelines intersect, eastern Padd 3 refiners will be able to source more Canadian crude at a lower cost. “Canada traditionally has accounted for a relatively small share of heavy, sour imports to complex refineries in this region, largely due to limits on the ability to transport Western Canadian crude there -- and the higher costs associated with crude-by-rail or pipeline-and-barge deliveries,” noted RBN's Housley Carr. Displacement and Exports The eastern Gulf Coast refineries that run heavy, sour currently tend to import it from Saudi Arabia, Iraq and Mexico. Venezuela was a major source as well until the US slapped sanctions on the country, as Carr notes (OD Jun.17'21). Refiners in eastern Padd 3 also consume domestic medium and heavy grades such as Mars, which is blended and stored in caverns near St. James. As more Canadian crude travels southward and directly accesses the region, long-haul waterborne volumes are most likely to drop. WCS and other grades could also displace Mars, freeing up more of those volumes for export. However, the potential capacity of the reversed Capline could quickly outstrip the capacity of regional refiners to run WCS-type crude. This creates incentive for exports, but the infrastructure to accommodate much higher flows remains challenged. The Louisiana Offshore Oil Port (Loop) can load very large crude carriers, but getting from St. James to the Loop remains an issue, as the pipelines in the area do not run in that direction. That could set up a bottleneck in St. James, and present an opportunity for the development of more midstream capacity. Marathon Petroleum did have plans for a 600,000 b/d pipeline from St. James to the Loop -- the proposed Swordfish pipeline -- but as of now the project is shelved indefinitely. Frans Koster, New York

Oil Supply, Oil Pipelines, Crude Oil, Midstream Companies
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