Why is permian oil "locked in" when refineries abound?

(edited)

Why is Permian oil considered locked in when refineries and pipelines abound around the Permian fields? Is it because exporting is preferred so companies can keep American gasoline prices higher than they should be with abundant oil in America?

See https://seekingalpha.com/article/4182569-wins-oil-price-differentials-widen-permian-basin 

 

and refinerymap.png

 

pipeline-map-resized.JPG

Edited by ronwagn
added reference

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2 hours ago, ronwagn said:

 Is it because exporting is preferred so companies can keep American gasoline prices higher than they should be with abundant oil in America?

That sounds sinister, perhaps unfairly so.

Exporting is preferred when companies can get a higher price for it through exporting it, plain and simple. I sell my services to the highest payer, regardless of where they are located. Not sure anyone else should be held to a different standard. US oil companies operate in their own best interests (or in the interests of their shareholders, as a proxy for operating in their own best interests), and rightly so. 

And perhaps a bit overly simplistic, but all oil is not equal--our refineries here are not equipped to process an infinite variety of crude grades. Much of the US refinery infrastructure were built prior to the shale revolution, and therefore were built to run other grades of crude, like heavy stuff. Our refineries still need those grades. So we can pump ~11 million bpd until the cows come home, but our refineries can't process 11 million bpd of that grade of crude.

I don't think it is some evil plot. It's business.

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(edited)

Hard to export oil when you cannot get it to market.

It's a simple matter of there not being enough pipeline capacity to take all the new production to the Gulf coast. New pipelines are under construction as we speak, and when capacity exceeds production then prices will rebound to Brent levels.

Edited by Refman
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(edited)

11 hours ago, ronwagn said:

Why is Permian oil considered locked in when refineries and pipelines abound around the Permian fields? Is it because exporting is preferred so companies can keep American gasoline prices higher than they should be with abundant oil in America?

See https://seekingalpha.com/article/4182569-wins-oil-price-differentials-widen-permian-basin 

 

and refinerymap.png

 

pipeline-map-resized.JPG

Ron, the "Seeking Alpha" article written by Tortoise  fails to note certain logistics regarding the Cushing hub.  First, there is no rail line running anywhere near Cushing!   The nearest line I could locate is a Class III rail running through Depew, between Oklahoma City and Tulsa.  It was built, and is used as, a grain haul line. 

Tortoise has this discussion about rail capacity not being price-competitive, but again that is not realistic as respects the Permian (nor the Bakken, for that matter).  Rail lines are hampered in that they were not specifically built to handle crude unit-trains, they were constructed to haul the grain harvests. The emphasis was on trackage reach, so you get these lines that are all single-track and a number of "stubs" running into the sparse areas where there are elevators.  To start to handle volumes of oil, the RRs need to build passing sidings, so that unit trains can move in both directions.  Those sidings have to be long, probably a mile in length, and require either spring switches or switchmen to handle.  That is not done overnight.

Your further problem is the aftermath, or fallout, from the wreck at Lac Megantic, Quebec, where a runaway oil unit train with Bakken crude (and trapped gases in that crude) rolled down a hill into town and burned half the town down, killing 47. The upshot was the banning of Type 111 tank cars and the required replacement with new cars able to better withstand derail wrecks.  That new fleet is being built and is not yet operational in large numbers.  So the ability to move large quantities of Permian crude is not even there, forget about the pricing. 

So that leaves tanker trucks, not realistic for the volumes being pumped. 

There are some old abandoned track roadbeds still out there that in theory can be re-started as rail to Cushing area, then spurs into the tank farms.  But why bother?  It makes more sense to improve your rail lines from the Permian to the Gulf,  including new rail and passing sidings.  But you also need the tank cars, so there is your delay. 

What is not appreciated by the pipeline enthusiasts is that piping crude is not inherently cheap, either.  Oil is viscous and there is friction between the moving oil and the wall of the pipe.  You have to pay an energy penalty in big pumps that suck up lots of Hp. in order to move that oil.  You do not pay that penalty with rail.  Your rail friction is that of an incompressible steel rail wheel on an incompressible section of steel rail, so your power requirements are about as low as they can get. And the capital costs of rail are likely less than that of pipe. Plus, you can move other stuff on that rail line, so the line always has a future.  What is the future of an old oil line running to a played-out field?  That is not clear. 

Edited by Jan van Eck
change "pig pumps" to "big pumps"
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Jan you are talking of an energy penalty on pumping piped oil but that would be greatly reduced by using stranded natural gas or fuel from a mini refinery. Pipelines seem more logical to me but you have a lot more knowledge of the area. Stranded oil or natural gas has to be exploited to make money. Do you think they are waiting for a higher price to make it worthwhile?

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Rodent: I am all for exporting unless we have a shortage of fuel. Of course, the highest bidder should be able to buy the product otherwise. I am working off the "stranded oil" premise that has been stated for the area. 

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(edited)

1 hour ago, ronwagn said:

Jan you are talking of an energy penalty on pumping piped oil but that would be greatly reduced by using stranded natural gas or fuel from a mini refinery. Pipelines seem more logical to me but you have a lot more knowledge of the area. Stranded oil or natural gas has to be exploited to make money. Do you think they are waiting for a higher price to make it worthwhile?

First as to using up stranded natural gas:  sure, you can do that, but keep in mind that there are typically different corporations and sets of investors/shareholders involved in each, for the pump operations and the pipeline companies.  So then the question arises: what is going to be the transfer price for that stranded natural gas, now being sold and used to power pipeline pump stations?  Is it going to be some free gift? 

Pipeline operators like pipelines because that is what they do:  dig trenches, lay pipe, cover it over, and charge somebody to move their product through their line.  What are the advantages and disadvantages?  Well, as Kinder Morgan demonstrated, it costs billions to build that line  (especially when through difficult terrain), and interminable delays in permitting, and heaven help you if the pipeline breaks.  The problem with breaks in today's world is that you have a time delay before someone in the operator room notices, and shuts down the power.  In the interim a lot of oil gets pumped out at high pressures and if the break is over a river or above an aquifer  (such as the gigantic Ogallala Aquifer), then you are pretty much bankrupt, as no insurance company is going to write that policy of liability to pay for cleanup. 

And, also, a pipeline, with a defined lifespan due to corrosion, has no future for some other use.  OK, perhaps you can convert an oil line to push gas, but I don't see much else.  So when you consider the time delays and the capital costs, a pipeline is not a material cost advantage to a rail line. 

Can a pipeline carry more product than a rail line?  Yes, probably.  But that does not mean it is inherently cheaper to do.  The oilpatch has this bias for pipe, but a big part of that is that rail companies have traditionally been hidebound and pig-headed in their operations structures, so you don't get innovation in the industry the way you did back around 1910-1950. Where rail ops get structured around full use of assets (for example, get away from the old "block" system of section allocation) you can get quantum jumps in capital utilization. And that implies both a lot more oil being carried, and lowered costs.  Plus you can re-use that rail line for something else, such as grain and cattle, once the oil runs out. Is a pipe "logical"?  Sure it is, but only if (A) you route it so that it does not run over water, which is what Keystone XL was going to do  [big mistake, very poor thinking]; (B) you make it with a big enough diameter so that the friction of oil against pipe becomes a lower fraction of energy consumption (assuming you cannot get it to laminar flow conditions, and you might if the flow rate is slow enough); (C) you have such a vast amount of oil that you can recover the CAPEX easily and not end up with some stranded asset as Kinder Morgan did until they sold that line to the Canadian Taxpayers to get out from underneath; (D) you have no line failures and hefty enviro payments to make for cleanup; (E) the people on the receiving end of that pipe are going to be around to accept and use or ship that oil being sent there.  Remember: with an oil train you can change the destination instantly.  Hard to do with some buried pipe. 

As to holding back on oil/gas in the ground for some later higher price:  probably not, but that is just my guess.  Remember, neither you nor I have access to some zipper in the back of the skulls of those guys, we cannot pull their brains out and examine them to determine their thought processes.  Maybe some day, but not in my lifetime, so your hunch is as good as anybody else's.  Cheers.

Edited by Jan van Eck
punctuation
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refer to attached slide 5 from macrovoices (free - best financial podcast there is) Feb interview on unconventional oil grades. Can't make diesel from some of it; lower margins for refiners.  

Pat Hemsworth interview on 31-May-18 is worth listening to if you want to understand Permian situation and price drivers.

"So, as many people clearly understand, it’s really all about the Permian. So, you know, looking at the numbers, we’re ahead of where we were for tight oil production in 2015, but not hugely ahead. The real story is in Slide 5. And Slide 5 addresses – you’ve mentioned one of my favorite axioms, which is that rigs don’t produce oil, wells do. And the other axiom I’ll introduce is that not all oil is equal. And, of course, EIA and IEA, they know that. But that’s not really included in their forecasts. They’re smart people, so I don’t want to take that away from them. But they seem to lose track of the fact that not all oil is equally refinable, equally valuable, and therefore adds equally to the market. So if we look at the graph on the left, what I’ve done there is to divide US conventional production by API gravity, which is just how light or how heavy the oil is – the lower the number the heavier, the higher the number the lighter. And the important thing for everyone to understand is that the average input to US refineries is about 32 API gravity (which is in that cyan blue color), of which there is a fair amount in the conventional part of US production. And without a magnifying glass you’re not going to be able to find it in the unconventional or the tight oil portions. So what that says is that most of the oil that comes from the Permian Basin and the Eagle Ford and the Bakken and all of that is not refinery-ready. You can’t just stick it into a refinery and manufacture gasoline and diesel and all that other stuff out of it. And that’s a real problem. Because the world – their refineries are designed just like ours. So you either have to send it to some very specialized refineries, of which there are some, in China, in Latin America – their volume is constrained and you have to compete with other light oil to get in, which means discounting. Or you have to blend it with a lot of heavy oil. The graph on the right breaks down the various Eagle Ford, Permian, Bakken, the main sources of tight oil – the type section or average tight oil – and then conventional. And you see the problem real clearly. And that is that there’s almost no refinery-ready oil from the tight oil plays. So what that says is you can produce as much as you want of this stuff. And let’s forget for moment about the lack of availability of frack crews and completion and the things that you talked about. Let’s assume you could just readily turn a well into supply. You still don’t have refineries that are capable of turning it into a commercial product. And that’s a huge problem. So the numbers are on the graph – only 2% of US tight oil is refinery-ready. 12% is what we call light, which is with a little bit of tweaking, blending, you can pretty quickly get it into a refinery. And 85% of it is ultra-light. What does that mean? Forgetting about the technicalities, what that means is that, even if you can refine it somehow, it makes crappy gasoline, low-octane gasoline that has to be put through some other process to add octane, to make it commercially sellable. The other thing that’s an even bigger hit against it is that it contains no middle distillates. And, forgetting the technicalities, that means you can’t make diesel out of it. So it’s not good for gasoline, although you can fix it at cost. And it’s no good for diesel. And those are the two biggest commercial products that crude oil produces. So, here’s the problem. And nobody as far as I can tell – I won’t say nobody, but certainly almost nobody – at EIA or IEA is addressing this problem. You can produce all of it you want. You can’t use a bunch of it. That is a huge problem."

 

Art Berman Feb-2018.pdf

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13 hours ago, Jan van Eck said:

Can a pipeline carry more product than a rail line?  Yes, probably.  But that does not mean it is inherently cheaper to do. 

Pipelines can transport vastly oil more than rail can, and they can do it for half the price. There is simply no comparison.

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35 minutes ago, Refman said:

Pipelines can transport vastly oil more than rail can, and they can do it for half the price. There is simply no comparison.

OK, let's run some numbers to see how that works out. 

Your typical oil rail tankcar contains some 34,000 gallons (US) and the typical train length on the BNSF is 106 cars.  So that train is hauling roughly 3,740,000 gallons of crude.  

If your pipeline is using 4-foot diameter pipe, the volume per running foot works out to 12.5 cu. ft per linear foot, so with oil at a density of 873, or 54.5 lbs/cu ft. so you have 685  lbs oil (based on Texas light crude) per linear foot of that pipe.  Figure 7.2 lbs/gal and you get 95 gallons per linear foot of pipe. So to yield that 3,740,000 gallons of oil sitting on that 106-car train, your pipe will have to be 39,338 feet long, or roughly 7.45 miles.  Let's treat that as a "block" of oil. 

Now, how fast will that "block" of oil move through that pipe?  I don't have any figures for that, but remembering that oil is a viscous fluid, even with big pumps pushing the stuff I would doubt that it flows much over 10 mph.  I concede I could be way off, yet it strikes me as a conceivable number. Your oil is pushing along at running speed. 

Now, your RR train running on 115-lb rail at Class 4 track will be rolling along at 60 mph.  If you have steady nerves you can run that train legally at 79 mph, but let's assume you don't have steady nerves and pick 60 mph as your train speed.  Hey, Texas is on the flat, so not that much of a challenge. You can transport your 3.74 million gallons the 600 miles to portside in ten hours. If you run those trains with a seven-minute window, which is what you see today on the Union Pacific mainline between Chicago and LA, you can deliver 8 trains an hour, or 30 million gallons of crude an hour, on single-track rail. In ten hours you will have delivered 300 million gallons of crude. 

To push your "block" of oil through that pipe at 10 mph will take you 60 hours. But there are no discontinuities in the pipe, so you are pushing oil at the rate of 10 mph constantly, at a flow rate of 374,000 gal/hour, or your block of 3.74 million gallons in the same ten hours.    At those speeds, rail simply swamps oil. 

So why, you ask, is rail more expensive than pipe? There are a number of factors:  (1) the loading system is low volume.  You don't load all 106 cars at the same time, and you probably don't even have the empty cars ready to roll under the loading docks in the first place.  So loading is vastly under-utilized.   

(2) the RR guys are stuck in the 19th century.  They don't run trains on a dispatch with positive train control (not yet) and even if they did, they are allotting vast amounts of trackage, including the blocks ahead and behind, as empty space, in order to keep the trains from running into each other.  But that utilization factor of the rails is a function of organization, so sure you have to fire the old managers and bring in new blood, but that is a human-factors matter, not something inherent in rail operations. And (3), I suspect the unloading suffers from the same inefficiencies as the loading, so it takes forever to turn around the empties.  And (4), because the RRs can charge what they want and get away with it, so the customer pays for a ton of inefficiencies.

But remember: a rail tankcar has a diameter of some ten feet, and holds a lot of material, and can roll along at 60 mph.  Your thin pipeline holds much less material and cannot move product at 60 mph.  So if done "right" a RR can always ship far more oil than pipe.  And if you can ship more, you can ship it for less cost.  Just because the existing system does not do that does not mean it can not.  Cheers.

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Jan I always enjoy your posts, even when I don't agree with you. In a perfect world a rail system might equal a pipeline, but the trouble is that we don't live in that perfect world, and as you correctly pointed out, the railroads don't seem too intent on improving. It doesn't matter what a theoretical train can carry or deliver, real world experience has shown that pipelines beat out rail every time, delivering crude at 1/2 the price of rail. 

It's also why there is no rush to build crude by rail facilities in the Permian, because by the time new rail facilities could be built, there will be more pipeline capacity coming online. If rail could compete it would be built, because the oil companies don't care how the oil gets to market, as long as it's cheap and reliable.

 

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50 minutes ago, Refman said:

Jan I always enjoy your posts, even when I don't agree with you. In a perfect world a rail system might equal a pipeline, but the trouble is that we don't live in that perfect world, and as you correctly pointed out, the railroads don't seem too intent on improving. It doesn't matter what a theoretical train can carry or deliver, real world experience has shown that pipelines beat out rail every time, delivering crude at 1/2 the price of rail. 

It's also why there is no rush to build crude by rail facilities in the Permian, because by the time new rail facilities could be built, there will be more pipeline capacity coming online. If rail could compete it would be built, because the oil companies don't care how the oil gets to market, as long as it's cheap and reliable.

 

All true, and yes, the rail guys are being slobs and not chasing after new paying customers.  Could they do it?  Sure.  Will they?  Nope. 

It reminds me of the (I think it was the BNSF) that saw this huge volume of Coors beer being trucked into the LA area.  Now those trucks could go at 60 mph, OK, so the average was less due to mountain grades, but still, could hustle right along, and when Coors shipped out by the boxcar load, the rail (possibly UP, don't remember exactly)  guys would just leave that boxcar sitting in some yard until they had another 200 cars to make up the train.  But that was no good for Coors, so they dumped rail and went to more expensive truck.  So along come the RR salesmen and say to Coors:  "Look, you give us the business, you get this fat discount over trucking, and we will totally, absolutely guarantee that your beer will be sitting in LA at your dock in 24 hours."  So that was the proverbial Offer they could not refuse, and Coors signed on.

Now what the RR did was set up a dedicated locomotive(s) for the Coors run, and no matter the size of the train, at the witching hour off it went.  If there was other freight it got hooked on, but nothing was allowed to delay the evening departure time.  And Coors got their beer train on time, every time, the RR picked up some new coin, and everybody made money.  The moral: it can be done, but somebody has to develop the willpower to see to it that it WILL be done!  Cheers.

 

PS  and if I was the President of whatever RR served the Permian, I would be running unit trains one right behind the other, using line of sight for maintaining separation, one mile apart, with the conductors in touch via walkie talkie, and I would pull every drop out of that basin all on rail, and could probably do it for the same price as pipe.  But then, I don't run that RR, so it is a bit of a whimsical argument. Oh, well. 

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