Gray Oak & the US pipeline bonanza


The latest pipeline being built to carry crude oil from West Texas to the US Gulf Coast is almost complete, marking another step towards the US becoming a major oil exporter.

The Gray Oak pipeline, with a capacity of 900,000 barrels per day (bpd), has begun to fill with crude and should begin service in November with full service expected to begin early 2020, according to Phillips 66, which owns 42% of the project.

“With the complexity of the [Gray Oak] pipeline, it’s not just pipe; it’s terminal, storage and so forth,” said Timothy Roberts, a vice president of operations.

We’re getting it up in phases as you can imagine,” he said October 25 on a quarterly earnings call.

You can think of the pipeline as just one piece of a logistical puzzle to move crude from Permian Basin oil fields to Gulf Coast refineries and ports.

This challenge is exacerbated by the staggering amount of new construction. A boom is underway to build new pipelines, storage terminals & deepwater ports.

The pace of completions has major ramifications for the volume of US exports, domestic production trends and crude price spreads, to name a few.

How can you stay on top of everything? It’s not easy.

Ursa monitors infrastructure under construction in the Permian Basin and the US Gulf Coast using satellite imagery, including the three big pipelines — EPIC, Cactus II and Gray Oak.

For example, the satellite image below comes from Ursa’s Pipeline Construction Report (Aug. 2019). It shows the construction of the Gray Oak Pipeline reaching a key terminal approximately 15-20 miles outside the Corpus/Ingleside area.


Imagery credit: SkySat (Aug. 7, 2019)
Annotations: Ursa

EPIC and Cactus II pipelines came online in August, bringing more than 1 million bpd in additional capacity.

This rush of supply from the Permian to the Gulf Coast drove inventories in Corpus Christi temporarily higher until exports increased.

We measured Corpus crude stocks rising by 3.4 million barrels (+25%) between the weeks ending August 1 and October 10.

The start-up of EPIC and Cactus II alleviated a bottleneck caused by inadequate pipeline takeaway capacity.

That problem — and its resolution — is visible in the dramatic swing in crude price differentials between Midland, Texas and Cushing, Oklahoma.

The discount for Midland (vs Cushing) reached almost $17 a barrel in September 2018.

Since August, however, that discount decreased and then flipped to a premium, quite a turnaround over the course of less than a year.

However, Midland’s premium is offset by the transportation costs between the Permian and Cushing, keeping the two grades roughly at parity.


Source: Ursa

Even more pipelines are being built, but the focus has now shifted toward the new terminals and ports under construction.

Nine deepwater ports have been proposed that would be capable of fully loading a VLCC tanker.

Only one such place exists today — Louisiana Offshore Oil Port — which was built decades ago to handle crude offloaded by tankers at a time when imports and Gulf of Mexico production were vital to US refineries.

For example, Gray Oak will be connected the South Texas Gateway Terminal when that project is complete.

Phillips 66 owns a 25% stake in the South Texas Gateway Terminal, which will have two deepwater docks and 7 million barrels of storage capacity.

Another investor, Buckeye Partners, received a permit from the US Army Corps of Engineer to begin dredging. The projected start-up is mid-2020.

A key site we’re monitoring closely is the expansion of MODA Ingleside Energy Center (MIEC), a terminal with connections to EPIC, Cactus II and Gray Oak.

Want to know when we expect the expansion of MIEC to be complete? Interested in learning more about our infrastructure monitoring product?

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