Crude Oil Price Differentials and Pipeline Investment Shaun McRae January 5, 2018 ITAM
Rapid growth in production since 2011 has reshaped geography of oil markets in the US 10.0 7.5 Million barrels/day U.S. Oil Production 5.0 2.5 0.0 2004 2006 2008 2010 2012 2014 2016 Source: EIA crude oil production 1
Total length of US crude oil pipelines increased by 37% between 2010 and 2016 80 60 Miles (thousands) 40 20 0 2004 2006 2008 2010 2012 2014 2016 Source: PHMSA Annual Hazardous Liquids data 2
Economic costs and benefits of major oil pipeline projects are ignored or misstated in media reports http://www.cbsnews.com/news/who-benefits-from-the-keystone-xl-pipeline-and-dakota-access-pipeline-pros- cons/ 3
This paper studies the economic effects of additions to pipeline capacity • Additional pipelines displace shipment by more expensive alternatives (such as rail or trucks) • Greater use of cheaper pipelines reduces the price dispersion across regions and the price discount to world prices • Refiners pay more for their inputs • Oil producers receive more for their output • Possible environmental effects from displacement of rail—not considered here 4
Oil deliveries by pipeline to refineries increased by a third since 2009, matching increase in overall pipeline length 12.5 Pipeline Rail 10.0 Million barrels/day 7.5 5.0 2.5 0.0 2008 2010 2012 2014 2016 2008 2010 2012 2014 2016 Source: EIA refinery receipts of crude oil by pipeline and rail 5
Monthly oil shipments by rail in 2016 less than half their level during 2015 1.25 1.00 Million barrels/day 0.75 0.50 0.25 0.00 2005 2010 2015 Source: EIA movements of crude oil by rail 6
Large decline in the mean absolute deviation in US wellhead prices since its peak in 2011 and 2012 12.5 Mean absolute price differential ($/barrel) 10.0 7.5 5.0 2.5 0.0 2005 2010 2015 Source: EIA state-level crude oil first purchase prices 7
Similar decline in the mean discount of US wellhead prices from benchmark price (LLS) 30 Mean wellhead discount to LLS ($/barrel) 20 10 0 2005 2010 2015 Source: EIA state-level crude oil first purchase prices; Bloomberg 8
Stylized economic framework
Suppose we have an isolated region with oil production and in- elastic oil demand from local refineries P Oil Re fi nery supply demand Q 9
Without any trade (“autarky”) the price of oil in this region will be very low P Oil Re fi nery supply demand P aut Q aut Q 10
The world price of oil is much higher... but the oil needs to be transported out of the region to a market hub P Oil Re fi nery supply demand P world P aut Q aut Q 11
There are low and high cost methods for transporting the oil, each with a limited capacity P Local+export Oil supply demand P world Pipeline Rail Q 12
Local oil producers will receive price P 1 , discounted from the world price to reflect the cost of transporting the last barrel P Local+export Oil supply demand P world Pipeline P 1 Rail Q 1 Q 13
Suppose there is an expansion in pipeline capacity out of the region, so that all exported oil can be carried by pipeline P Local+export Oil supply demand P world Expansion Pipeline P 1 Rail Q 1 Q 14
The price received by local oil producers increases from P 1 to P 2 , reducing the discount from the world price P Local+export Oil supply demand P world Expansion P 2 Pipeline P 1 Rail Q 1 Q 2 Q 15
Local oil producers will be better off as a result of the higher price (and slightly higher production quantity) P Local+export Oil supply demand P world Expansion P 2 Pipeline P 1 Rail Q 1 Q 2 Q 16
Local oil refineries are worse off because now they pay a higher price P 2 for their crude oil input P Local+export Oil supply demand P world Expansion P 2 Pipeline P 1 Rail Q 1 Q 2 Q 17
Oil shippers with access to the original pipeline are also worse off, because they can no longer profit from buying oil at P 1 P Local+export Oil supply demand P world Expansion P 2 Pipeline P 1 Rail Q 1 Q 2 Q 18
Overall welfare increases after the pipeline expansion, due to reduction in transportation costs and higher oil production P Local+export Oil supply demand P world Expansion P 2 Pipeline P 1 Rail Q 1 Q 2 Q 19
Pipeline expansions in the Permian basin
Oil production in the Permian basin increased by 1.2 million bar- rels/day between 2010 and 2016 2.5 2.0 Million barrels/day 1.5 1.0 Production 0.5 0.0 2008 2010 2012 2014 2016 Source: EIA Drilling Productivity Report 20
Only four pipelines out of Permian basin in 2010: Borger, Basin, Centurion, West Texas Gulf Original pipeline New pipeline after 2012 Oil refinery Main Permian fields Rail loading terminal Rail unloading terminal Source: EIA geographical shape files 21
Rail loading terminals in Permian and Eagle Ford allowed ship- ment by rail to Gulf Coast refineries Original pipeline New pipeline after 2012 Oil refinery Main Permian fields Rail loading terminal Rail unloading terminal Source: EIA geographical shape files 22
Six new pipelines were constructed (or converted) between 2012 and 2016, increasing access to Gulf Coast Original pipeline New pipeline after 2012 Oil refinery Main Permian fields Rail loading terminal Rail unloading terminal Source: EIA geographical shape files, Sunoco Logistics 23
Permian production exceeded refinery and pipeline capacity in 2012 and again in 2014 2.5 2.0 Million barrels/day 1.5 Refinery + pipeline capacity 1.0 Production 0.5 0.0 2008 2010 2012 2014 2016 Sources: EIA oil production; EIA refinery capacity utilization; RBN Energy and other news reports 24
Periods with excess supply associated with large price differen- tials between Permian (WTI Midland) and Gulf Coast (LLS) Excess supply Million barrels/day 0.0 −0.2 Monthly Permian Basin production, −0.4 less refining and pipeline capacity 30 $/barrel 20 10 WTI Midland discount to LLS 0 2008 2010 2012 2014 2016 Sources: Excess supply calculation (previous slide); Bloomberg 25
Periods with excess supply associated with large price differen- tials between Permian (WTI Midland) and WTI Cushing Sources: Excess supply calculation (previous slide); Bloomberg 26
Periods with excess supply associated with large price differen- tials between Permian (WTI Midland) and Gulf Coast (LLS) 30 Price difference ($/barrel) 20 10 0 −0.4 −0.3 −0.2 −0.1 0.0 0.1 Excess supply (million barrels/day) Sources: Excess supply calculation (previous slide); Bloomberg 27
Empirically analyze the relationship between price differences and excess supply • Allow WTI Cushing-LLS price differential to matter when marginal oil is sent to Cushing • Include year fixed effects • Change definition of refinery capacity 28
Societal benefits of $1.9 million/day compare to pipeline rev- enues of $0.3 million/day Decompose the change in revenues and costs as a result of a hypothetical pipeline expansion $ million/day Higher oil producer revenue $17.6 Higher oil refinery costs $2.7 Lower oil shipper profits $13.0 Lower transportation costs $0.9 Higher oil production $1.0 29
Higher input costs (mostly) reduced refinery profits rather than being passed on to gasoline consumers 0.75 0.75 Price difference ($/gallon) Price difference ($/gallon) 0.50 Crude oil (LLS − WTI Midland) 0.50 Crude oil (LLS − WTI Midland) 0.25 0.25 0.00 0.00 Gasoline (Houston − Midland) Gasoline (Houston − El Paso) −0.25 −0.25 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2017 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2017 30 Source: GasBuddy.com
Refinery capacity utilization was already high and did not change as a result of the lower prices 1.2 Inland Texas Refineries Individual Refineries 1.0 Refinery capacity utilization 0.8 0.6 0.4 Refinery Big Spring 0.2 El Paso 0.0 0 10 20 30 0 5 10 15 LLS − WTI Midland differential LLS − WTI Midland differential 31 Source: EIA, Texas Railroad Commission
Analysis for other oil producing regions
Colorado: Increase of about 250,000 barrels/day in oil produc- tion as well as greater oil pipeline capacity 0.4 Million barrels/day 0.2 Refinery + pipeline capacity Production 0.0 2008 2010 2012 2014 2016 Sources: EIA oil production; EIA refinery capacity utilization; RBN Energy and other news reports 32
Colorado–WTI Cushing price differentials are higher in periods with shortfall in pipeline capacity 15 Price difference ($/barrel) 10 5 0 −0.2 −0.1 0.0 0.1 Excess supply (million barrels/day) 33 Sources: Excess supply calculation (previous slide); Bloomberg; own calculations
Large increase in Bakken production not matched by additions to pipeline capacity 1.25 1.00 Million barrels/day 0.75 0.50 Refinery + pipeline capacity 0.25 Production 0.00 2008 2010 2012 2014 2016 Sources: EIA Drilling Productivity Report; EIA refinery capacity utilization; ND Pipeline Authority and news reports 34
Recommend
More recommend
