Seaway expands to reduce midwest glut as oil flows to Gulf

Jan. 11 (Bloomberg) — Enterprise Products Partners LP and Enbridge Inc. have completed an expansion of the Seaway pipeline that will increase the supply of crude oil from the U.S. Midwest to refineries along the Gulf Coast.

The 500-mile (805-kilometer) line running from Cushing, Oklahoma, to Freeport, Texas, has resumed full service after shutting Jan. 2 to complete the final connections necessary to expand the line’s capacity to 400,000 barrels a day from 150,000 barrels, the companies said.

Seaway’s expansion may shrink the price gap between U.S. and international crudes as it reduces a glut of oil in the midcontinent and lowers imports to the Gulf Coast, home to about half of the country’s refining capacity. Supplies at Cushing, the delivery point for U.S. benchmark West Texas Intermediate oil futures, rose to a record 50.1 million barrels in the week ended Jan. 4, Energy Department data show.

“Certainly the implication is you’ll start to see a greater deterioration of Brent-WTI spreads,” Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania, said by phone. “You’re certainly going to see that narrow as more Seaway barrels come online.”

The spread between West Texas Intermediate oil traded in New York and North Sea Brent crude narrowed to the lowest level in almost four months, slipping as much as $1.22 to $16.85 a barrel, the smallest gap since Sept. 20.

The Seaway Pipeline expansion more than doubles the line's crude carrying capacity from Cushing Okla. to the Gulf Coast. (Houston Chronicle)

Seaway Rates

Seaway was flowing at 280,000 barrels a day as of 7:30 a.m. eastern time, Hillary Stevenson, a Louisville, Kentucky-based data integrity analyst for Genscape Inc., which monitors electrical output at pumping stations, said by phone.

WTI sank to as low as $27.88 below Brent in October 2011 and averaged $17.47 a barrel less than the North Sea grade last year, a record discount in annual terms.

U.S. oil production increased to 7.002 million barrels a day in the week ended Jan. 4, the highest level since March 1993, the Energy Department said Jan. 9.

The spread will average $15.63 a barrel this year and narrow to $8.25 in 2014, the EIA, which is part of the Energy Department, said in a Jan. 8 report. The Brent premium will shrink because increasing pipeline capacity will lower the cost of shipping oil from the central U.S. to refineries on the Gulf Coast, according to the report.

Brent Impact

“The impact is greater on Brent than WTI as Cushing becomes better linked to the world oil market,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston. “Midcontinent refineries lose some of their raw material advantage to some of the Gulf Coast refineries.”

Brent usually traded at a discount to WTI from the introduction of the European contract in 1988 until 2011. Brent was at an average $1.19 discount during the first decade of this century.

Seaway previously carried imported crude north to Cushing, before Enbridge and Enterprise reversed the pipeline’s flow in May to deliver domestic oil to the Houston area. The expansion is the first of several projects this year that promise to alter the oil pricing landscape in the U.S.

Enterprise and Enbridge plan to further expand capacity on the line to 850,000 barrels a day by the first quarter of 2014 by building a new pipe parallel to the existing route. The companies expect to begin construction July 1, according to permits filed with the Railroad Commission of Texas.

TransCanada Pipeline

TransCanada Corp. expects to pump 700,000 barrels a day to the Houston area from Cushing by mid-to-late 2013 on the southern leg of its Keystone XL pipeline, which began construction last summer.

The lines will draw supplies from the Midwest, where crude inventories swelled to 115.1 million barrels last week, the highest in weekly data back to 1990, the department said. Stockpiles of crude on the Gulf fell to 162.6 million barrels a day last week, the lowest level since March 2.

Magellan Midstream Partners LP and Sunoco Logistics Partners LP expect to finish separate projects adding 425,000 barrels a day by the middle of the year to the Houston area from fields in west Texas, which have access only to nearby plants and Cushing.

Those pipelines, along with lines transporting growing production from the Eagle Ford shale formation in south Texas, are expected to move the U.S.’s oil glut south to the Gulf Coast from Cushing. That may depress the value of Gulf Coast benchmark Light Louisiana Sweet crude, which reached $29.75 a barrel over WTI on Sep. 29, 2011, and was at a $16.85 premium today.

Crude Flood

“You could flood out all the light, sweet imports from the Gulf Coast and crush LLS without even involving any of the Bakken production,” said Bradley Olsen, an analyst at Tudor Pickering Holt & Co. in Houston. “All these factors are converging in 2013 and hitting the Gulf Coast hard while avoiding the middle of the country entirely. In 2013, after two years of depression, WTI could start to make a little bit of a recovery versus some of the higher-value coastal crudes.”

Shortly after the Seaway line resumed operations, Genscape detected a shutdown of the four pumping stations it monitors along the pipeline, Stevenson said in an e-mail today. A total of seven pump stations service Seaway.

“The start-up process is proceeding normally and the line continues to transport crude oil,” Rainey said in an e-mail responding to questions.

—With assistance from Lynn Doan in San Francisco, Mark Shenk and Eliot Caroom in New York, Barbara Powell in Dallas and Edward Welsch in Calgary. Editors: David Marino, Charlotte Porter