Pipelines Will Be The Energy Story of 2013 - Yes, Again

Draft.

In progress.

There was a snippet of a WSJ Transcript interview the other day suggesting that pipelines will be the energy story of 2013. Based on comments I have received, and my own internal polling, it appears that 73% of MDW readers "get it"; 22% do not "get it"; and, 5% don't really care.

That snippet was very short, but here were some of the data points:

• domestic light oil production will exceed all light oil imports as early as July, this year
• domestic light oil exceeding light oil imports will be due to pipelines, not rail
• 20 major -- repeat, major -- pipeline projects being developed and started this year (2013) into Houston: 4 million bbls into Houston
• another 20 major -- repeat, major -- pipeline projects on the board for 2014: another 4 million bbls into Houston 
• total US imports is about 8.5 million bopd (both light and heavy)

Those data points were at the link.

Anything written after those data points are personal observations and could be way wrong, but at least where I'm wrong, readers will correct me.

Some observations and/or assumptions on my part:

• the Bakken represents only 12% of total US production; to date, it is mostly the Bakken that is utilizing rail in addition to pipe (about 60/40); the other US fields still use pipeline
• the interview leads with 40 pipeline projects in 2013 and 2014; because the Keystone XL is not (yet) approved, the interview could not include the northern segment of the Keystone XL; the interview might have included the southern section which is being built
• heavy oil (Brent oil, California oil, and Alaska oil) goes to the east coast and west coast
• the heavy oil refineries are concentrated on the coasts
• the light oil refineries are concentrated along the Gulf Coast (Texas and Louisiana)
• Venezuela oil is heavy oil and could be off-loaded either at the Gulf Coast or East Coast for about the same transportation price
• the Seaway story has two parts: a) capacity was increased from 150,000 to 400,000 bopd; b) the flow was reversed in direction; dismissing one "part" is almost as bad as missing both "parts" of the story
• mineral rights owners in the Bakken tell me their oil is being sold at a discount because a) there is a glut of oil at Cushing; and, b) the oil is being transported by rail
• if there is a glut at Cushing, all things being equal, the Bakken operators have to choke back their spigots
• if Bakken oil is selling at a discount for any reason, Bakken operators might do what North Dakota farmers have done for years: store their commodity locally waiting for better prices; farmers store their grain in co-op elevators; oil companies store their oil in the ground (as original oil in place); unlike farmers, oil companies don't even have the expense of "harvesting" their commodity and then paying for "storage" while waiting for better prices
• if overnight, the glut at Cushing goes away (or diminishes), the Bakken operators can open their spigots; I could be wrong, but I don't think it costs a lot of money to open spigots on an oil well
• so, if global demand for oil is decreasing (recession in Europe and slowdown in China), all that US light oil (Bakken and other WTI oil) will "flood" the entire oil market and will depress oil prices; all things being equal that should happen; except all things are not equal: Saudi still sets the price of global oil and Saudi won't accept oil below a certain price; it now turns out that Saudi quietly cut production in December; and, that global recession in Europe -- yup, it's true, but that slowdown in China, like Mark Twain's death, greatly exaggerated: see "China's surprisingly strong data fans optimism" by that most fair and balanced media outlet, the BBC, just two days ago; and this article, "Don't bet on Chinese slowdown in 2013," reported today, in that most conservative of publications, the WSJ;
• one can argue that WTI won't flood or upset the pricing dynamics of global oil supply and demand (again for two reasons: Saudi supply goes down; Chinese demand goes up)

So, enough of this.

Now back to that poll, where 73% understand why pipelines will be the energy story of 2013, and why 23% don't get it.

The 73% who "get it" understand this story is not about the pipelines themselves, although that is a huge story in its own right; the story is about the derivatives or the secondary effects of the 40 major pipeline projects coming on-line over the next two years.

So, given ...

• increased takeaway capacity out of the Bakken moving forward
• that increased takeaway capacity will be predominantly pipeline, not rail; rail becomes less expensive)
• the glut at Cushing diminishes; the Bakken operators can open the spigots
• Chinese economy improving
• Saudi anticipating lower oil demand, already cuts production; Brent rises 
• the WTI/Brent spread narrows
• huge backlog of fracking/completing Bakken wells at the end of 4Q12

... who are the winners?

• the mineral owners in the Bakken, including the state; if the demand is there for light oil, the spigots will open. 
• Delta Airlines: the airline that rails Bakken oil to its east coast refinery. With increased takeaway capacity, pressure on rail to lower prices; no doubt they've hedged their contracts for 2013 even if Bakken oil sells higher;
• Enbridge, EPD, EEP, now that the "seed corn" is starting to produce
• fracking companies; oil services companies
• Bakken operators 
• refiners? I don't know. I don't know enough about the refining industry. [Update: Mike Filloon is a bit hard to read on this; he has been bullish on refiners due to the WTI/Bakken spread, and knows that spread will now narrow. But my interpretation of what he writes is that he remains bullish on the refiners.]

... who are the losers?

• theoretically, the Bakken rails, but probably won't be noticeable for several years (in fact, it's possible, existing rail/CBR terminals will see increased activity, but additional pipeline capacity will put pressure on rail)

To be continued.

In Progress.