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Keystone XL, Dakota Access Could Cause Bottlenecks at U.S. Mid-Continent Storage Hubs, Shift Crude Prices

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Presidential Executive Orders touting the construction of Energy Transfer Partner’s Dakota Access and TransCanada’s Keystone XL pipelines recently advanced the controversial projects that together would move more than one million bpd of crude to Midwest storage hubs. But, the new flow routes could create a takeaway bottleneck, which would have price implications for U.S. and Canadian crudes. While the price of West Texas Intermediate (WTI) at Cushing, OK, could fall due to additional supply, North Dakota Bakken and Alberta, Canada, heavy crude differential should strengthen due to added demand. 

Cushing, OK, stocks reached historical highs in 2012 due to increased incoming pipeline flows spurred by domestic and Canadian production and limited outgoing pipeline capacity. In November 2012, WTI was depressed as much as $22/bbl below Brent crude as inventories in Cushing rose.

Drilling under Lake Oahe in southern North Dakota for Energy Transfer Partner’s Bakken-to-Patoka, IL, Dakota Access (DAPL) crude pipeline began immediately upon receiving an easement from the U.S. Army Corps of Engineers on February 8, according to a company spokeswoman. It is expected to take 83 days for construction and linefill, she added. This action comes on the tailwind of a January 24 Presidential Memorandum directing U.S. Federal agencies to expedite approvals and reviews for remaining portions of Dakota Access, according to a statement issued by The White House Office of the Press Secretary.

The January 24 memo also put a deadline on the government’s review of TransCanada’s proposed 830,000 bpd Keystone XL pipeline, which would enable more Canadian crude to reach U.S. Mid-Continent and Gulf Coast refiners with the possibility of re-export. 

Keystone XL and Dakota Access Pipeline

A Cushing Crunch

The Keystone XL pipeline will be able to carry up to 830,000 bpd from Hardisty, AB, to Steele City, NB. Upon completion of the XL line, the Keystone system will be able to flow to Cushing and Patoka, IL, simultaneously. Preexisting infrastructure will provide connectivity from Steele City to both destinations. Once Keystone XL is completed, crude flows on the legacy line will flow to Patoka, leaving the Keystone XL line to feed Cushing directly. Currently, the legacy line can only feed one of the spurs leaving Steele City at any given time, limiting the pipeline capacity utilization to Cushing and Patoka.

Increased flows into Cushing due to the addition of Keystone XL could lead to a bottleneck of inventories at the hub, which would put downward pressure on crude prices.

At the beginning of February, there were 18 pipelines carrying crude into Cushing, totaling 3.6 million bpd of capacity, compared to 15 pipelines with nearly 2.7 million bpd of capacity carrying crude out of the hub. Inflow capacity is currently outpacing outflow capacity, with a net capacity of 841,000 bpd. The imbalance is actually 221,000 bpd greater than in 2012 when Cushing bottlenecked. However, no bottleneck has occurred in the past year because of a difference in capacity utilization for pipes moving in and out of Cushing.

Cushing net pipeline capacity

Incoming pipeline capacity utilization has averaged 51 percent thus far in 2017. Outgoing pipelines were operating at higher utilization rates during the same time, averaging 67 percent. The difference in utilization rates has led to a relative balance of netflow at Cushing. Should incoming pipeline utilization increase by 24 percent, existing outgoing pipeline capacity would become saturated, stranding barrels in Cushing. If outgoing capacity cannot keep up with incoming flows, WTI prices are likely to be depressed.

Keystone XL could increase total inflow into Cushing by about 475,000 bpd to 2.2 million bpd, a 14 percent increase in incoming pipeline utilization, based on average flows so far in 2017.

Currently, only one pipeline is planned to help mitigate the imbalance in Cushing–connected pipeline capacity. Plains All American and Valero are planning the 200,000 bpd Diamond Pipeline, which will increase pipeline capacity out of Cushing. The new line will connect to Valero’s 195,000 bpd Memphis, TN, refinery, and is expected online by the end of 2017, according to the company’s website.

As of February 3, crude inventories at Cushing have averaged 67.5 million bbls in 2017, and capacity utilization rates at the hub have remained above 70 percent since November 2016. Sixteen owners operate facilities at Cushing, totaling more than 90 million bbls of available capacity: Blueknight, Enbridge, Magellan, Plains All American, and Rose Rock Midstream each operate more than seven million bbls of capacity, and two companies, TransCanada and Barcas, have plans to expand their storage facilities, according to regulatory documents submitted to the Oklahoma Department of Environmental Quality. Upon completion, the construction projects will add an additional 30 tanks, or 8.1 million bbls of capacity, at Cushing.

Outgoing pipes from Cushing carry barrels directly to more than 1.6 million bpd of refining capacity in the U.S. Mid-Continent, but Cushing also has connectivity to the U.S. Gulf Coast, where more than eight million bpd of refining capacity is located.

TransCanada also has several tanks under construction in Hardisty, the origin of the Keystone pipeline system. The company began building eight tanks in 2013, totaling 2.7 million bbls. Construction on the tanks was nearly completed, but they never became operational after Keystone XL plans were halted in the legislative process, and these tanks have sat idle for years. It is possible that TransCanada will finally bring the new section of their Hardisty terminal online as the Keystone XL project is revitalized.

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Pipelines to Patoka

Keystone XL will also allow more Canadian crude to reach the Patoka storage hub, which is connected to nearly 2.25 million bpd of Mid-Continent refining capacity.

The Patoka storage hub consists of nearly 17 million bbls of operational tank capacity operated by seven different companies. Plains, Marathon, and Capline operated more than 80 percent of the operational capacity in February. As of February 3, 540,000 bbls of capacity were under construction and another 1.8 million bbls of capacity were in maintenance, while a total of 2.5 million bbls of incoming pipeline capacity and 1.3 million bpd of outgoing pipeline capacity were operational in February.

Tank storage utilization at the hub has been fairly consistent between 2016 and 2017; it has averaged 52 percent so far in 2017 compared to 53 percent in 2016, according to Genscape. However, that utilization may increase as the Keystone XL pipeline will allow barrels to flow to Patoka directly without having to share delivery with Cushing.

Assuming that the legacy Keystone pipeline was able to flow at capacity to Patoka, leaving Keystone XL volumes to supply the Cushing hub, incoming pipeline flow would increase by about 336,000 bpd to 1.1 million bpd, using 2017 average flows on Genscape monitored pipelines (Genscape monitors 83 percent of incoming pipeline capacity at Cushing).

The potential increase in Keystone deliveries would elevate incoming flow to nearly the existing outgoing pipeline capacity. Unmonitored flows on the Enbridge-operated 100,000 bpd Mustang and Marathon-operated 315,000 bpd Woodpat pipelines could push total incoming flow over outgoing pipeline capacity and cause barrels to pool in Patoka or back up at the origin destinations. Granted, Keystone flow is partially diverted to Phillips 66’s 306,000 bpd Wood River, IL, refinery, reducing crude reaching Patoka.

Incoming flow from the Dakota Access pipeline would further contribute to the net pipeline capacity imbalance. Once complete, the pipeline will cause incoming pipeline capacity to exceed outgoing pipeline capacity by nearly three million bpd.

However, Energy Transfer Partners also plans to add 470,000 bpd of new outgoing pipeline capacity, reversing the increase in net capacity gained by DAPL. The Energy Transfer Crude Oil Pipeline (ETCOP) project includes converting a natural gas pipeline to deliver crude to Nederland, TX.

Additional incoming barrels due to the completion of DAPL and/or Keystone XL would benefit refiners connected to the hub, including Marathon, BP, Husky, Citgo, Exxon and Phillips 66, which can source crude from Patoka for their Mid-Continent refineries.

Should pipeline supply exceed refinery demand at Patoka, additional outgoing pipeline capacity would be needed. There are several ways this might be addressed, including the possibility to reverse the 1.2 million bpd Marathon-operated Capline pipeline. The reversal is not likely to happen before new connectivity to Memphis, via the Diamond pipeline, is completed at the end of the year.

Data from Genscape’s Cushing Crude Oil and Patoka Crude Oil Storage reports advised the storage trends in this blog. Genscape’s storage data is collected using Infrared cameras, aerial diagnostics, and other proprietary measurement techniques. This approach translates into highly accurate, advance notice of the actual oil storage levels. Genscape's Mid-Continent Pipeline Service, which includes the Keystone pipeline system, also advised the pipeline information contained in this report. Updates on pipeline flows for 42 pipelines every 30 minutes with downloadable historical data, custom alerting, and intelligence reporting are included in the Mid-Continent pipeline service. To learn more or request a free trial of any of Genscape’s Oil Market Services, please click here

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