Thrown for a LOOP – Crude Imports and the Louisiana Offshore Oil Port Terminal – Part II

The Louisiana Offshore Oil Port (LOOP) is currently the nation’s largest waterborne crude import terminal. Throughput at LOOP has been declining as domestic crude production has increased. Crude oil imports were over 1 MMb/d in 2008 but dropped to 0.5 MMb/d by September 2012. Light sweet crude imports in September 2012 were 10 percent of their level in 2008. Today we look at future prospects for this huge marine terminal and storage facility on the Louisiana Gulf Coast.

Last time we described how LOOP is the largest US waterborne crude import terminal that can handle 1.2 MMb/d coming ashore from very large crude carrier (VLCC) oil tankers. LOOP also handles 0.5 MMb/d of Gulf of Mexico (GOM) crude production from the Mars and Thunder Horse fields. The Clovelly onshore terminal has 50 MMBbl of underground salt dome storage and 7.2 MMBbl of above ground tanks. LOOP is connected by pipeline to 50 percent of the nation’s refineries and offers crude importers a range of terminal services aside from storage including blending, title transfers and pipeline distribution scheduling.

The volume of imports passing through LOOP is declining. We assembled data for the chart below from Energy Information Administration (EIA) company level import reports. The blue line is monthly crude imports through LOOP averaged to a daily Mb/d number. The red line shows the trend. Overall import volumes have dropped from close to the LOOP maximum capacity of 1.2 MMb/d in August 2008 to as low as 340 Mb/d in July 2012. The EIA data is prone to inaccuracies because it depends on customs data that does not include crude that stays in the LOOP free trade zone. However, the declining trend is clear.

Source: EIA Company Level Monthly Import Data  (click image to enlarge)

Chart #2 below on the left breaks down the LOOP imports by crude type into light sweet crude (blue) and other medium and heavy crude (red). EIA report the API gravity of the crude as well as the sulfur content. We used low sulfur (less than 1 percent) and high gravity (greater than 32 API degrees) to define light sweet crude. All other crude imports went into the medium/heavy bucket. The values are Mb/d based on averages of the monthly total imports. The same caveats about the EIA data apply as for the previous chart. Since 2008 the volume of light sweet crude has fallen from highs close to 450 Mb/d in December 2008 to not much over 100 Mb/d since June 2011 and 65 Mb/d in September 2012. Chart #3 below on the right shows light sweet crude imports through LOOP as a percentage of the total (blue line) over the same time period. The trend (red line) is a decrease from 40 percent in January 2008 to less than 10 percent in September 2012.

Source: EIA Monthly Company Level Import Data (click image to enlarge)

The two trends are clear from the charts. First overall imports through LOOP are falling and second light sweet crude imports are falling as a percentage of total imports. To anyone reading RBN Energy’s analysis of US crude markets over the past year this will come as no surprise. We have covered increases in US crude production in the “big three” basins – the Bakken, Eagle Ford and Permian as well as increased Canadian production. We have documented the efforts of producers and midstream players to find a route to market for this crude. That path has led them to the largest crude refining center in the US – the Gulf Coast region (Department of Energy PADD 3) with 8 MMb/d of refining capacity. New infrastructure under construction and coming into service over the next two years will deliver an additional 3.1 MMb/d of domestic and Canadian crude to the Gulf Coast region from the Midwest and Texas by pipeline (see Oh-Ho-Ho Its Magic – The Bigger Gulf Coast Supply Demand Picture). In the meantime, increasing crude supplies have shown up at Gulf Coast refineries delivered by rail tank car or barge. All the new crude supplies reaching the Gulf Coast are backing out imports and therefore threaten LOOP’s existing business model as a crude import terminal.

New domestic crude supplies in the Bakken, Eagle Ford and Permian Basin being produced from tight rock shale formations have so far proved to be lighter, sweeter crudes than average with high API gravities and low sulfur content. These crudes can easily take the place of imported light sweet crudes that US refineries are running today. That is the reason why light sweet crude imports through LOOP are declining at a faster rate than heavier crude imports. If you have a refinery that runs light sweet crude then the domestic grades are less expensive to buy. Many US refineries, particularly in the Gulf Coast region are configured to run heavier sour crudes that require additional processing. As we discovered in “Turner Mason and The Goblet of Light and Heavy” complex refineries built to process heavy crudes cannot easily switch to light sweet crude. The result is that heavier crudes will continue to be imported into the US Gulf Coast region until heavier crudes delivered by pipeline from Canada replace them or the refineries make expensive changes to their configuration in order to handle light sweet crude. The only alternative is for those heavier refineries to run light crudes at a reduced capacity rate – a move they will only make when light sweet crude prices get real cheap.

With imports on the decline and new domestic crudes being delivered by pipeline and rail, there does not seem to be room for a large crude import terminal such as LOOP in the future supply picture. Changes in pipeline infrastructure in the Gulf Coast region are bringing domestic and Canadian crude towards Louisiana not hauling it away. The Shell Houston to Houma (Ho-Ho) pipeline reversal is a case in point. That pipeline used to take supplies that were imported through LOOP west to Houston area refineries (see Oh-Ho-Ho It’s Magic – The Missing Link for Gulf Coast Crude). Now supplies coming ashore from LOOP at Clovelly cannot reach Houston area refineries by pipeline so 4 MMb/d of refining capacity is cut off from LOOP importers. Shell will replace the westbound Ho-Ho in 2015 with their Westward Ho project but that is still two years away. In the meantime, the westbound Ho-Ho closure not only restricts access to Houston for LOOP importers but also brings 360 Mb/d of new flow into Louisiana from Houston on the reversed line – adding to the competition.

LOOP remains connected to the Capline pipeline that takes crude to Midwest refineries via Patoka, IL. However, Capline use is declining amid talk about reversing the 1.2 MMb/d pipeline to bring Canadian crude to Louisiana. Midwest refiners can get cheaper crude supplies from Canada than using Capline to bring imports up to Chicago.The Capline owners do not seem interested in a reversal plan at the moment but Energy Transfer have proposed reversing their natural gas Trunkline pipeline to bring 400-600 Mb/d of crude from Patoka to St James, LA. The Trunkline reversal would happen in 2015 if it goes ahead.

In spite of all this gloom and doom, there are some positive signs on the horizon for LOOP. The first is that it will continue to operate as an efficient landing point, storage and distribution center for GOM crude production. In addition to existing flows of 0.5 MMb/d from Thunder Horse and Mars, LOOP expects production from new discoveries such as the Mars B, Jack, St. Malo and Bigfoot fields slated to come online in the next few years (source: Shell Westward Ho Open Season). Once the Westward Ho link from St James to Houston is completed in 2015, there will be an additional 900 Mb/d of capacity to distribute these GOM crudes to Houston area refineries.

As we mentioned in the first part of this LOOP series, the port has not been idle in encouraging alternatives to importing foreign crude. Since August of 2012 one of the LOOP mooring buoys has been adapted to accommodate smaller medium range oil tankers of 300 MBbl size. The purpose of the change was to meet demand to move Eagle Ford crude from Corpus Christi, TX into Louisiana. The only constraint on that trade is the Jones Act restrictions on vessels carrying goods between US ports. Those restrictions increase costs and limit the number of vessels available for charter. Nevertheless press reports indicate that there are at least 3 Jones Act tankers moving Eagle Ford crude into LOOP and it makes sense. LOOP has great storage and distribution facilities. The very light API gravity Eagle Ford crude/condensate can also be blended with heavier crudes at LOOP. Blending light and heavy crudes can help overcome some of the constraints we noted earlier for refineries not configured to process very light shale crudes. To this end LOOP also added capabilities last month (November 2012) to blend crude in-tank at Clovelly in addition to the previously offered in-line blending service.

The reversed Ho-Ho pipeline is the only direct route for crude to travel from the Houston and Port Arthur area to Louisiana and its capacity is only 360 Mb/d. From 2013 there will be crude coming into Nederland (Port Arthur) from the Permian Basin, to Oiltanking Houston from the Eagle Ford and to Magellan’s East Houston Terminal from Cushing. Nederland and Oiltanking have waterborne barge facilities that could move crude to LOOP (that would require investment in new barge receipt facilities at LOOP).

Another potentially more profitable future business for LOOP is as a crude oil export terminal.  LOOP is the only US port big enough to handle VLCC oil tankers so it would be a good choice if exports were allowed. Trouble is right now crude exports are not allowed without a special license. The Bureau of Commerce has control over crude export licenses and currently only permits exports to Canada (see Fifty Shades Lighter – The Lease Condensate Export Problem for more on the export rules). At the moment it seems unlikely that the US will permit large scale exports of crude oil in the near term for political reasons. However with a rising tide of light sweet crude production and a large real estate of Gulf Coast refining capacity built for heavier imports, a trade off where light crudes are exported and heavy crudes imported makes a whole lot of sense to us. Otherwise as domestic crude supplies reach the Gulf Coast in greater quantities over the next two years, prices will need to be heavily discounted to persuade heavy crude refineries to run light crudes inefficiently instead of imports.   

Could light sweet crude trade at a significant discount to heavy crude, reversing the natural order of the universe?  We better stay tuned to this one.

Among the crude terminals that we have reviewed in this series, LOOP probably has the best facilities and connectivity to US refineries. It operates as an efficient import and redistribution hub for foreign and GOM crude. Unfortunately LOOP’s biggest disadvantage versus its competitor terminals is geography. It is literally facing the wrong direction for the flood of new US domestic production. However it is still the landing point of choice for GOM production that is expected to rise in coming years. An active trade in Eagle Ford crude cargoes is also expected to develop on the Gulf Coast that LOOP will play an important part in. In the future a US decision in favor of crude exports could reboot LOOP’s next iteration.