Survey: Quality is king
US producers and midstream players are honing their focus on delivering a clean and consistent barrel of crude as they reach further afield to find buyers for surging quantities of light, sweet supply.
To borrow a mantra from Enterprise Products Partners, quality is king and consistency is queen for the new export-oriented market for US crude oil. Since landmark legislation in 2015 opened the door for a major ramp-up in exports, the US Gulf coast crude pipeline infrastructure is being re-plumbed to point toward the tidewater and thirsty overseas refiners, mostly in Asia.
Overseas refiners are interested in US light, sweet crudes but have been "burned" in the early days of US exports by inconsistent quality, said Josh Baskett, vice president for oil and gas marketing at Continental Resources, the biggest producer in the Bakken shale, predominantly located in North Dakota.
"We have to ensure that our barrel is segregated, it is clean," Baskett told a meeting of the Crude Oil Quality Association (COQA) in Oklahoma City last week. "Otherwise we are going to lose credibility in the international market. Once you lose credibility with these Asian refiners, they are done with you. They will not even do another transaction with you."
That quality campaign is increasingly evident at Cushing, Oklahoma, the "Pipeline Crossroads of the World" that can warehouse about 95mn bl of crude oil and is the delivery point of the Nymex WTI light sweet contract.
New Cushing crude quality specifications that took effect in January have given US producers and refiners more clarity and predictability on the quality of light crude blends batched for pipeline shipment at the Cushing hub, known as Domestic Sweet (DSW).
Cushing's tanks are home to about 50 grades of crude, sourced from both nearby Permian fields as well as the Bakken, Niobrara, and an increasing amount of Canadian heavy supply. Some of the grades are segregated and batched for shipment, but much of it is blended into the common DSW stream.
To maintain the quality of DSW supplies leaving the tanks at Cushing, big storage terminal operators like Plains All American, Enterprise and Enbridge have rolled out a wide-scale quality-monitoring program, including on-site testing at the terminals as well as sophisticated in-line sensors that can detect when incoming pipeline streams are off-spec.
Policing people
Enterprise is working to maintain quality through enhanced testing and specifications, as well as enforcing pipeline specifications on streams inbound to its terminals.
"We are good at policing people when our injectors … go off spec," Enterprise vice president of distribution services Natalie Gayden told the company's investor day meeting on 10 April.
The CME Group, the home of the Nymex WTI light sweet crude contract that has a physical delivery option at Cushing, in December 2017 revised its WTI quality specifications for Cushing to test for distillation, vanadium, nickel, total acid number (TAN) and micro carbon residue, as well as the traditional measures of API gravity and sulfur content.
Though the testing has brought a complex process on a massive scale to Cushing, "Everything has been progressing well with the quality," CME senior director of energy research Dan Brusstar told the COQA meeting. "Overall people are happy with it."
The new quality standards have given counterparties that trade financial crude more confidence to take delivery of physical barrels at Cushing, a so-called "exchange for physical" transaction or EFP, Brusstar said.
"With the additional testing the companies have confidence that they can do an EFP with their counterparty and get that good quality," he said.
The API gravity specs for Cushing crude may need "tweaking" down the road because supply from the Permian basin is trending lighter, Brusstar said. In addition, current vapor pressure specifications may need to be updated because they have not been reworked for about 40 years, he said.
The new specifications emerged from a need by US refiners to have more control and predictability over the barrel that they were purchasing, said Dennis Sutton, COQA's executive director who spent most of his career as a refining expert at Marathon Petroleum. "From the COQA's standpoint it has been a success."
Gravity and sulfur, while important, are not comprehensive in characterizing a crude stream, Sutton said. "It would be like drafting football players strictly on their height and their weight — yes those things are important but they do not tell the whole story," he said.
The growing supply of crude traveling from the Permian basin to the US Gulf coast could cause an oversupply in the second half of 2019 and into 2020, Continental's Baskett said. However, the "logjam" will get worked out as US export infrastructure expands to meet the demand, he said.
The end-result could be a new pricing model for US crude that looks at more of a waterborne price than a Cushing price, he said. "You are going to have a Brent price and a US Gulf coast price, and those are going to be your two major markers globally going forward," he said.
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