Wednesday -- October 15, 2014

Active rigs:

	10/15/2014	10/15/2013	10/15/2012	10/15/2011	10/15/2010
Active Rigs	190	184	189	195	153

RBN Energy: could a refinery re-start in the tropics?

In mid-September 2014 the joint venture partners in the shuttered St. Croix (U.S. Virgin Islands) HOVENSA refinery announced an agreement in principal to sell to a private equity fund. The refinery – shut since January 2012 - has been for sale since then but after losing $1.3 Billion in its last 3 years of operation has had trouble finding a buyer.

Today we look at the hurdles a new owner has to overcome.

The HOVENSA refinery used to supply most of its refined products to the East Coast. According to data from the Energy Information Administration (EIA) HOVENSA accounted for a monthly average 15 percent of all refined product imports to the U.S.

Atlantic Coast region – known as Petroleum Administrative District for Defense (PADD) 1 in 2010. That percentage dropped to 12 in 2011. The largest share of PADD 1 imports is from Canada with 28 percent in 2010 and 27 percent in 2011.

Since HOVENSA closed down in 2012, Canadian refined product imports to PADD 1 have risen to average 31% in 2012 and 37 percent in 2013. But as we described in blog posts back in July 2012, the advent of lower priced U.S. domestic crude has led to a recovery in East Coast refining – reducing the need for imports somewhat.

Booming refinery throughput in the Gulf Coast region has also expanded potential transfers of refined products from that region to PADD 1 but these are constrained by limited pipeline capacity between the two regions and the high cost of marine shipments arising from Jones Act regulations. The Jones Act requires shipments between U.S. ports to be made on U.S. flag vessels with U.S. crew and labor regulations, which increases the shipping cost by several $/Bbl compared to non-U.S. flag vessels.

The higher cost of Jones Act vessels has been exacerbated in the past two years by rising competition for tankers from producers shipping crude along the Gulf Coast and from the Gulf Coast to PADD 1 - increasing the freight cost further. As a result, prices for refined products on the East Coast have generally been higher than at the Gulf Coast and there have been periods of shortage – most notably during Hurricane Sandy in 2012 when the government issued Jones Act waivers to ensure adequate gasoline and heating oil supplies reached the Northeast.

So the HOVENSA refinery still has a potential market for refined products on the Atlantic Coast. And importantly in the context of the potential sale of HOVENSA - the refinery was previously and will continue to be - exempt from the Jones Act regulations – even though the USVI is a U.S. territory.

That means the refinery can ship refined products to PADD 1 at a lower cost than Gulf Coast refiners who are bound by the Jones Act provisions – a significant potential advantage for a new owner. Although the location of HOVENSA is not close to the U.S.; it is closer to Florida and New York than to the Gulf Coast.

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US Energy Renaissance

Houston Business Journal is reporting:

Kinder Morgan Energy Partners LP said Oct. 14 that it will invest approximately $240 million to expand two terminals at the Houston Ship Channel.

The expansion will include the construction of 2.1 million barrels of storage between the Pasadena and Galena Park terminals.

It also includes building a new ship dock and infrastructure improvements at Galena Park, which will increase the terminal's vessel load rates to up to 15,000 barrels per hour.

Kinder Morgan announced a similar expansion last year.

Why is this important?

“The new tankage will provide refined product producers and traders the ability to send more barrels to the water for international exports or to the network of pipelines for domestic use,” John Schlosser, president of Kinder Morgan Terminals, said in a statement. “Kinder Morgan will now have nine ship docks on the Houston Ship Channel and will double the load rates on existing docks. We see continuing strong demand for transporting fuel to the Gulf Coast to reach export markets.”

Buried in the story, but perhaps just as important as it relates to Mexico:

Separately, Kinder Morgan also said  its Tennessee Gas Pipeline Co. successfully closed a binding open season for its South System Flexibility Project, awarding the natural gas supply arm of Petróleos Mexicanos 100 percent of the project capacity.

Kinder Morgan Energy Partners' Tennessee Gas Pipeline is a 13,900-mile pipeline that transports natural gas from Louisiana, the Gulf of Mexico and south Texas to the northeast section of the United States, including New York City and Boston.

Think about that. The Marcellus and the Utica are literally in New England's backyard and this Tennessee Gas Pipeline, all the way from Texas, is reserving 100% of the pipeline for Mexican natural gas. This should give folks an idea of a) how much natural gas the Northeast expects to use this winter; and, b) the pipeline constraints coming from the Marcellus and the Utica.

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A Trapped Bear

Crashing oil prices could crush Putin.  Putin loses his closest friend: expensive oil.Vladimir knows what will move the price of oil higher.