US oil surplus could impact downstream
Land-locked oil producers are running out of options to get key feedstock to market as pipeline and rail capacity fills up and the truck driving shortage intensifies.
While downstream producers grow concerned about getting key feedstocks, a squeezed supply chain means costs for getting end-product petrochemicals to customers are also increasing, an analyst told Petrochemical Update.
U.S. hydrocarbon production is at all-time highs for crude oil, dry gas and natural gas liquids (NGL) production, according to the U.S. Energy Information Administration (EIA).
U.S. crude production is at record levels even with 35% fewer rigs than the 2014 peak.
Image: PLG Consulting
The Permian Basin in West Texas is now nearly 45% of onshore rigs. U.S. Southern Shale plays including the Permian, Eagle Ford, Cana Woodford, and Haynesville make up more than 60% of onshore rigs.
In the Permian, there is a lack of pipeline capacity to transport the oil to the U.S. Gulf Coast where it can be loaded on a tanker for export or used as a feedstock for major petrochemical facilities.
“The crude production growth rate will be hindered due to the Permian pipeline takeaway capacity issue through 2019,” PLG Consulting President Taylor Robinson said while speaking at the Midwest Association of Rail Shippers (MARS) 2018 Summer Meeting.
There are no major pipeline projects planned to begin until to mid-to-late 2019, Robinson said.
Some analysts are voncerned that a drawback on feedstocks could impact downstream production, but Robinson said it would have to be an extended drawback.
"At some point, the oil producers will slow their crude production growth due to the pipeline capacity issue. However, the current production levels will be maintained. A byproduct of the crude production is the NGLs which are used for petchem production," Robinson said. "If the crude and NGL production volumes out of the Permian stay stable for the next 18 months, I don’t anticipate a major issue to the petchem producers as there should be adequate NGL supply from the Permian and other shale plays."
Rapid growth in the Permian Basin in West Texas has resulted in producers looking for alternative market access such as railroads and trucks to move their barrels from West Texas to the U.S. Gulf Coast, but producers are seeing challenges and cost increases there as well.
“Rail challenges include: no existing high-volume rail loading terminals in operation; rail infrastructure in the region is congested with limited capacity available; and a number of frac sand or mothballed terminals are trying to develop truck to railcar transloading,” Robinson said.
Trucking challenges include a national driver shortage with the Permian area even more driver-challenged, Robinson said.
“In addition, there is no existing long-haul crude trucking market; only 180 barrels can be sent per truckload,” Robinson said.
Producers are paying adders of up to $8/barrel to transport Permian crude by rail to the coast and up to $20/barrel to transport crude via truck.
Now the problem becomes one of sufficient rail and truck capacity availability. Companies such as Union Pacific see it as a growth opportunity.
The shortage of pipeline takeaway capacity from the Permian is creating opportunities for Union Pacific to move crude oil in tanks cars, the railroad company said.
“The Permian is an interesting place and we’re definitely seeing some reduction in crude production due to the lack of pipelines,” Chief Marketing Officer Beth Whited said in an earnings webcast. “We have some capacity in our network and expect to see some results in the third and fourth quarter.”
Loading terminals in Texas and New Mexico have a capacity of 300,000 barrels/day, but about 100,000 barrels/day of that capacity can be used to load crude as those facilities are for frac sands, Bernstein said.
Frac sands are used in hydraulic fracturing by shale producers.
It is a similar story in the land-locked Western Canada Sedimentary Basin. Canadian Pacific Railway said they see the potential to double the volume of crude it hauls to refineries in the U.S. Midwest and East Coast by 2019, Chief Marketing Officer John Brooks said in an earnings call.
Canadian Pacific sees the potential to move 98% more barrels/day by late 2018 or early 2019 from earlier this year.
The railroad moved 134,000 barrels/day in the second quarter and sees the potential to increase to some 266,000 barrels/day.
A railcar typically moves about 600 barrels. In the first quarter, Canadian Pacific moved 17,000 cars and in the second quarter, the railway moved 20,000 car loads.
Crude by rail shipments could more than double over the next two years from already historic highs as a lack of pipeline capacity forces producers to look for alternatives, the International Energy Agency said in its April 2018 outlook.
The driver shortage has intensified in the trucking industry because of retirement and new regulations. Freight costs have increased as a result and analysts expect costs to continue rising.
The U.S., Germany, and Japan face a shortfall of 565,000 drivers, about 7% of the driver population in the U.S. and nearly 1/3 in the other two countries, according to Morgan Stanley data.
In the U.S., the electronic-logging device (ELD) mandate imposes an 11-hour cap on driver’s work days and is limiting their productivity.
Meanwhile, the North American petrochemical industry will likely invest around $145 billion in shale-driven industrial facilities through 2025, according to PLG Consulting’s Shale Gas Industrial Expansion Logistics Database (SHIELD).
According to SHIELD, the shale renaissance has prompted $255 billion in U.S. investment announcements. Since 2011, $51.1 billion has been commissioned. By the end of 2019, another $45.1 billion worth is expected to start up. A second wave between 2020 and 2025 is likely to bring forth another $48.5 billion worth of investment. SHIELD is predicting that at least $101 billion of announced investment will not get off the ground.
Processed gas, ethylene, methanol, and resins account for more than 80% of the product volume output.
The North American polyethylene (PE) expansion is unprecedented, and exports will be necessary for an over supplied U.S. market, Robinson said.
North American PE Expansion Plans
Image: PLG Consulting
By 2025, the U.S. will be a major PE exporter, shipping more than 1 million tonne/year to Central America, South America, Africa, Western Europe, India and China each, according to PLG Consulting.
Most PE exports are handled by third-party packagers off site. Product travels by rail to the packaging facility, and then by truck and or rail to barge.
Currently the great majority of PE volume is exported from the Port of Houston where nine major packaging companies are in operation throughout the area.
Packaging facilities are expanding in other markets to accommodate growth and account for potential constraints in Houston such as congestion, container supply, weather, and export vessel sailings.
While the oil market is using more crude and rail, analysts say this is not enough yet to impact the overall availability for U.S. Gulf petrochemical truck and rail sector, although higher costs are possible.
"The increased demand for rail & truck to move some crude out of the Permian is not significant compared to the overall rail & truck capacity in the Gulf Coast.," Robinson said. "They don’t compete for the same resources."
By Heather Doyle