Seaway pipeline starts lottery to dissuade speculators

By Dan Murtaugh
Bloomberg News

Enterprise Products Partners LP is instituting a lottery system this week for space on the Seaway pipeline after speculators drove requests to ship crude oil up to almost 2,400 times the available capacity.

The lottery will be used for the 10 percent of pipeline space that Enterprise has set aside for uncommitted shippers with less than a year of regular use on the line. That category has grown to 275 shippers in April from five in May 2012, and includes Canadian business-school students, the company said in a filing with the Federal Energy Regulatory Commission. FERC approved the lottery system April 12.

The rush for space on the pipeline underscores the effort shippers are willing to make to move crude from the Cushing, Oklahoma, storage hub to the Gulf Coast, where similar grades of oil cost almost $12 a barrel more. Seaway, the only pipeline running that route, charges about $4 a barrel. In April, companies asked to move 70 million barrels a day, Enterprise said, almost 10 times U.S. daily oil production of 7.21 million barrels.

“Speculators and individuals with no apparent access to crude oil are attempting to game the system by signing up as new shippers, presumably in an attempt to broker the space in a secondary market,” Enterprise said in an April 2 filing. “Seaway receives approximately five-to-10 inquiries a week from persons seeking to become new shippers, including most recently from various business students in Toronto, Canada.”

Crude Prices

Light Louisiana Sweet crude, the Gulf Coast benchmark, was $11.85 a barrel above West Texas Intermediate in Cushing yesterday, according to data compiled by Bloomberg. Seaway charges uncommitted shippers $3.82 a barrel for light crude and $4.32 for heavy.

The speculative market for Seaway space has grown as rising U.S. and Canadian crude output has boosted stockpiles at Cushing, the delivery point for futures contracts traded on the New York Mercantile Exchange. Inventories reached an all-time high of 51.9 million barrels Jan. 11 and were 51.1 million barrels as of April 12, according to Energy Information Administration data.

“Clearly, demand is there for increased amounts on Seaway given current inventory levels in Cushing and the price of sweet crude in Cushing and the Gulf Coast,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston. “So this is really a new phenomenon based on the fact that production is surging in the Midcontinent region and pipeline space to move the oil today is limited.”

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

Line Reversal

Enterprise and Enbridge Inc., each of which owns 50 percent of Seaway, reversed the line in May to run north-to-south. It increased capacity in January and now transports about 295,000 barrels a day, Enterprise said in the filing.

Rick Rainey, a Houston-based spokesman for Enterprise, referred questions about the lottery to the company’s public filings. Larry Springer, a Houston-based spokesman for Enbridge, referred comment about Seaway to Enterprise, which operates the line.

Enterprise allots 90 percent of capacity for committed shippers or those who have moved at least 60,000 barrels a month on the line for 12 consecutive months.

The remaining 10 percent, about 29,500 barrels a day, goes to what Enterprise calls “new shippers.” In May 2012, new shippers requested to transport 142,000 barrels a day down the line.

Line Apportionment

When nominations exceeded capacity, Enterprise apportioned the amount each shipper could move based on a percentage of its request. That made less space available for each shipper and made it difficult for new shippers to reach the level needed to become regular shippers, the company said in a filing.

It also presented a headache for Enterprise. Each delivery on Seaway has to be at least 60,000 barrels. When allocations were smaller than that, Enterprise had to cobble together different shipments of the same crude in order to make a batch. Enterprise in March moved up the nomination deadline to the 15th of each month from the 25th to be able to process the requests.

The batching process is expected to get more difficult next year, as Seaway increases to handling as many as 20 different kinds of crude from six types, Enterprise said.

The lottery system, which went into effect April 15, will make each winner ship at least the minimum amount for a batch or pay a penalty, which will probably weed out some speculative nominators and make scheduling easier, Enterprise said in the filing.

Seaway is increasing capacity to as much as 850,000 barrels a day in the first quarter of 2014, according to Enterprise. TransCanada Corp. is building a 700,000-barrel-a-day pipeline running south to the Gulf Coast from Cushing that is expected to be in service in mid-to-late 2013, the company has said.