In addition to the Eagle Ford Enterprise line, numerous other pipelines, including Kinder Morgan Inc (NYSE:KMI)‘s Crude Condensate pipeline, Koch Industries’ Pettus to Corpus Christi Line, Magellan Midstream Partners, L.P. (NYSE:MMP)‘ Double Eagle Pipeline, are expected to provide a combined 650,000 barrels per day of capacity from the Eagle Ford to Houston and more than 1.3 million barrels per day from the Eagle Ford to Corpus Christi, according to a special report by Platts.
This raises an important question. Are the Gulf Coast refiners ready for the deluge of crude oil coming their way?
Gulf Coast crude oil mismatch
It’s tough to say. Over the past several years, many Gulf Coast refiners invested heavily in equipment designed to process heavier crudes. After all, how were they to know that advances in drilling technologies were about to fuel a domestic energy renaissance that would bring hundreds of thousands of barrels of light oil their way?
While many of the heavy oil refineries do have the capability to handle lighter crudes, it’s not exactly the most efficient way to run their facilities. Running light oils at refineries geared for heavier grades can underload or overload different cracking units, which can lead to suboptimal utilization rates.
According to the EIA, in order for Gulf Coast refiners to process greater quantities of light sweet crude, they would need to rebalance their crude slates, upgrade their equipment, or reduce their usage of equipment designed to process heavier crudes.
All of these options are likely to result in the uneconomical use of Gulf Coast refining facilities. Moreover, due to the costs involved with these options, refiners may be reluctant to pay a premium for new supplies of light crude, which is likely to exert further downward pressure on price.
Final thoughts
Only time will tell whether Gulf Coast refining capacity will be overwhelmed by the flood of light sweet crude coming their way over the next couple of years. Keith Schaefer of the Oil & Gas Investments Bulletin recently told The Energy Report that he thinks Gulf Coast refiners will find themselves ill-equipped to handle growing volumes of light sweet crude. He suggests that there simply isn’t enough refining capacity.
Other commentators argue that Gulf Coast refiners may actually be a lot more flexible than Schaefer suggests. Geoffrey Styles, managing director of GSW Strategy Group, an energy and environmental strategy consulting firm, noted in a recent article: “It’s worth recalling that no significant new oil refinery has been built in the U.S. since the 1970s, although many have been upgraded substantially since then. That means that most of today’s Gulf Coast refineries have cores that were built at a time when domestic light sweet crude was still abundant.”
Both arguments have merit so it’s hard to pick sides. I guess we’ll just have to wait a little while to see who’s right.
The article Is the U.S. Gulf Coast the New Cushing? originally appeared on Fool.com and is written by Arjun Sreekumar.
Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners L.P., Kinder Morgan, and Magellan Midstream Partners, L.P. The Motley Fool owns shares of Kinder Morgan.
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