The Fuse

How Can East Coast Refiners Reduce Imports From OPEC? Pipelines from the Bakken Are Key

by Matt Piotrowski | June 15, 2017

  • Launch of DAPL to push even more Bakken crude south
  • East Coast refiners import at times more than 1 mbd
  • More volumes coming from Nigeria, Saudi Arabia, Angola & Algeria
  • Mariner East 2 pipeline in eastern Ohio to begin in 2H

Crude oil pipelines have become political lightning rods in recent years. One need not look further than TransCanada’s Keystone XL. After years of deliberating, the Obama administration decided not to approve the pipeline on environmental grounds, a major symbolic victory for anti-fossil fuel activists. But as soon as Donald Trump took office earlier this year, he reversed the decision, arguing that it will create jobs and boost the U.S.’ move toward energy independence. Right now, the battle over the controversial Dakota Access (DAPL) line from the Bakken in North Dakota to Patoka, Illinois is heating up again. On Wednesday, a U.S. District judge ordered another environmental review but stopped short of shutting it down. While the conflicts over these pipelines dragged out, thousands of miles of crude pipelines were constructed across the country to move burgeoning shale oil output, reducing costs and dangers associated with transporting crude by rail. The fights over the justification of the pipelines have grabbed the most attention, but the upending of trade flows from new infrastructure will have long-term consequences.

The pipeline build-out has altered not only trade movements in the U.S. but also internationally. As more crude from the Bakken fields has been piped to refiners on the Gulf Coast, less has gone to East Coast facilities.

The pipeline build-out has altered not only trade movements in the U.S. but also internationally. As more crude from the Bakken fields has been piped to refiners on the Gulf Coast, less has gone to East Coast facilities. With this, the U.S. has ironically increased its dependency on imports as the arbitrage for Midwest crudes to the East Coast has fully slammed shut. The launch of the DAPL at the beginning of this month solidified this trend.

Recent EIA data show East Coast imports have been volatile and occasionally exceeded 1 million barrels per day (mbd). Though some volumes come from the North Sea or Canada, most are imported from OPEC countries. After reducing imports from Nigeria to virtually zero, East Coast refiners now take in close to 300,000 b/d from the West African country, which produces light, sweet crude that is a good fit for their plants. In Q1, East Coast imports from OPEC totaled 478,000 b/d, a 41 percent year-on-year increase.

EastCoastImportsRise

Buyers on the East Coast had taken as much as 458,000 barrels per day (b/d) from the U.S. Midwest, but that fell to below 90,000 b/d as of March of this year. The number is likely lower now given that oil is now flowing through the 570,000 b/d DAPL.

At this point, there’s no reason any more Bakken crude will be sent via rail to the East Coast.

At this point, there’s no reason any more Bakken crude will be sent via rail to the East Coast. On the flip side, more than 1 mbd of crude is piped from the Midwest to the Gulf Coast, triple what was seen in 2013, and about 22 times the amount in 2009.

Mariner East 2 pipeline to provide a panacea?

One solution to reducing the East Coast’s dependence on imports would be to ship Bakken crude (after it’s piped to the Gulf Coast) by tanker to refineries in Padd 1. But due to the Jones Act, which requires American vessels to ship oil between ports in the U.S., that avenue is too expensive. The other possibility is, of course, to build crude oil pipeline capacity. Just 7,700 b/d of crude is now sent by pipe from the Midwest to the East Coast. As noted above, given the opposition to building new pipelines and the high up-front costs, it’s uncertain if the needed infrastructure will be built. Controversy has gone beyond Keystone and DAPL, with the Diamond Pipeline from Cushing, Oklahoma to Tennessee and the Energy East project in Canada, among others, seeing opposition. Environmental groups have built a sophisticated network to oppose pipelines, highlighting safety incidents and possible water damage.

There is a possible opening, however, for Bakken crude to flow all the way to the East Coast, with the Mariner East 2 expansion project.

There is a possible opening, however, for Bakken crude to flow all the way to the East Coast. The Mariner East 2 expansion project, which will carry 450,000 b/d and is set to come on stream in the second half of the year, connects eastern Ohio to the East Coast.

marinereast

The owner Sunoco Logistics says that the pipeline could carry refined products and condensates. Since Bakken crude has low viscosity, it could travel in this pipeline. Still, in order for the crude to reach the Mariner East 2 pipe, a gap needs to be bridged to eastern Ohio from DAPL’s endpoint in Patoka or other stations in Indiana or northern Ohio. The state already has a complex system of pipelines built by Marathon, so increased coordination among operators could allow the crude to flow east. Whether refined products, NGLs, or Bakken crude will travel in Mariner East 2 is up in the air, but it will make it at least feasible to move crude produced in North Dakota to reach East Coast refineries. Bakken crude, after all, already flows to eastern refineries in Canada with assistance of pipelines in the U.S. Midwest.

Limited midstream capacity leads to an inefficient market and means that domestic crude can’t reach certain buyers.

If the Mariner East 2 project doesn’t do the trick, the consequences of not having the right infrastructure need to be further considered. Limited midstream capacity leads to an inefficient market and means that domestic crude can’t reach certain buyers. In turn, greater volumes come via tanker from countries like Nigeria, Saudi Arabia, Algeria, and Angola. That’s more U.S. dollars heading to petro-states that don’t have the best environmental and human rights records.

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