U.S. crude exports rundown

Let’s rewind the clock by one year. WTI was nestled comfortably at $52/barrel, crude exports were booming, and there were over half a dozen projects intent on building export terminals capable of handling Very Large Crude Carriers (VLCCs). Today, WTI is on the wrong side of $40/barrel (and after considerable U.S. production cuts), crude exports are flat or even declining, and nearly every proposed VLCC-capable terminal is facing severe difficulties. Where do crude exports go from here? This article will explore why and where the United States exports crude, why VLCC-capable terminals are important, and which terminals are competitively positioned in the post-COVID environment.

Why the U.S. exports crude

The United States is a net importer of crude, but also the world’s fourth largest exporter. Why? Largely because of a mismatch in crude grades for domestic refineries. The Permian and Eagle Ford basins produce crude that is relatively light and sweet. U.S. refineries, however, were built well before the tight oil boom and are configured to optimize inputs from heavier grades. Since U.S. crude faces some structural barriers in its home market, much of it is exported overseas.

U.S. crude export destinations

Europe and the Indo-Pacific account for most of the planet’s population and over 53% of world GDP. It’s therefore not surprising that about 75% of U.S. crude exports are bound for these two regions. Indeed, as U.S. exports grew from just 0.47 million barrels per day (MMBPD) in 2015 to 3.0 MMBPD in 2019, the Indo-Pacific and Europe accounted for nearly the entire increase. The Indo-Pacific market is of paramount importance: the region is massive, growing rapidly, is short of crude, and its refineries are highly accommodative of light crude. The prize is in the Indo-Pacific.

Crude exports to the Indo-Pacific slowed in 2018 and 2019 amid U.S. – China trade tensions, however. It’s also worth noting that U.S. crude exporters will also face growing pressures from structural U.S. – China tensions and European decarbonization efforts. For now, however, let’s examine where U.S. crude is shipped from.

U.S. Export Terminals

Most U.S. crude exports ship from either Corpus Christi, Houston, and Port Arthur. The infrastructure at these ports includes pipeline connectivity; storage; refinery complexes of varying sizes, which allows for greater optionality; and, of course, export terminals. As we discussed in a previous Insight, Corpus Christi exports have surged on new inbound pipelines such as Cactus II, EPIC, and P66’s Grey Oak. New export terminals have also bolstered exports. The Eagle Ford terminal, a JV between Plains and Enterprise, started shipments in 4Q 2019; EPIC’s Corpus Christi terminal also initiated operations in the fourth quarter. Finally, the Buckeye Partners/P66 South Texas Gateway tie-up is supposed to begin shipments in 2H 2020, although we won’t be surprised if its start date slips into 2021. Corpus Christi will likely remain the largest exporter of crude through at least the end of 2020, barring a collapse in production from the nearby Eagle Ford basin.

Future of exports: VLCCs?

LOOP LLC is currently the only terminal in the United States capable of fully loading very large crude carriers, or VLCCs (some terminals can partially load a VLCC, but only through expensive reverse lightering techniques). Look at St. James, LA (where LOOP is located) exports above: you’ll notice that exports rose sharply in the early summer of 2019, and after COVID-19’s effects materialized in early 2020. It’s probably not a coincidence that freight rates were elevated during those periods. VLCC’s attractiveness increases along with higher freight rates, greater distances, widened Brent-WTI spreads, and the need for floating storage.

Over the long-term, U.S. crude exports’ competitiveness will be influenced by its ability to ship via VLCCs. As their name indicates, VLCCs carry a lot of crude – typically about 2 million barrels, although it depends on crude specifications. VLCC’s economies of scale enables cost benefits over smaller vessels. A rule of thumb we’ve heard is that a VLCC voyage to Asia can provide about a 15-20% shipping freight advantage over Suezmax vessels (for a more detailed assessment, feel free to drop us a line). Producers in countries with VLCC-capable vessels, such as Saudi Arabia, accrue significant competitive advantages by shipping via VLCCs.

VLCC projects

U.S. exporters are not blind to the advantages VLCCs offer. We’re aware of a dozen existing, post-FID, or planned projects that have a VLCC component. LOOP is the only terminal capable of fully loading a VLCC without using “reverse lightering.” As we’ve discussed in prior Insights, however, LOOP is far from the most prolific shale basins: its distance from Eagle Ford and Permian production leads to “rate pancaking” along pipelines and constrains its ability to export oil. Two other terminals are capable of partially loading VLCCs: the Seaway/Enterprise Texas Marine Terminal in Texas City and Moda Ingleside in Corpus Christi. Let’s talk about the nine projects in various stages of development – but first, take a look at the landscape in the graphic below.

As you might expect, VLCC projects under development have been buffeted by low oil prices and, of course, COVID-19. Texas COLT and other projects are reported to be “on hold” and are very unlikely to proceed any time soon, barring major changes. Texas COLT was originally a JV between Kinder Morgan, Enbridge, and Oiltanking. Kinder dropped out of the project, while Enbridge actually joined a competitor by signing on to Sea Port Oil Terminal (SPOT). COLT will probably never leave the shore: Oiltanking likely won’t progress the project on its own.

SPOT is further along than probably any other project, but it still faces difficulties. Enbridge’s maneuver is a vote of confidence, and the project secured Chevron as its anchor customer. As a result of its commercial progress (and perhaps to deter other would-be entrants) SPOT has already taken FID. The project still faces regulatory hurdles, however, as the Coast Guard and the U.S. Maritime Administration (MARAD) recently suspended its review after asking for a list of landowners affected by the project. While the terminal is offshore, storage tanks will be sited on land, drawing ire from some landowners and environmental groups. SPOT has made substantial commercial progress, but regulatory risks are worth watching carefully, as are Enterprise and Enbridge’s commitment to the platform.

Other offshore VLCC projects have followed a similar pattern as SPOT: one or more companies will partner with one another, reducing capital costs. The Phillips 66/Trafigura proposed Bluewater Texas Terminal seems to make excellent strategic logic for both parties. Trafigura’s prior proposed terminal, Texas Gulf Terminal, had a planned capacity of ~500,000 bbl/d. Bluewater Texas Terminal can load approximately 16 VLCCs per month. As each VLCC is filled with ~2.0 – 2.2 million barrels, Trafigura would maintain the TGT’s volumes in the 50/50 JV – but probably at a lower unit cost, assuming economies of scale. P66, meanwhile, reduces its project capex through the JV. On the other hand, the project is facing some regulatory uncertainty.

Similarly, Sentinel has partnered with Freepoint Commodities to advance the Texas Gulf Link project; Magellan Midstream Partners has previously discussed constructing its own VLCC-capable terminal, but is expressing interest in teaming with Sentinel and Freepoint. While Texas Gulf Link has made progress, economic and regulatory uncertainties remain.

The crude export game is the same, it just got more fierce

Exporting crude has never been easy, but demand and supply factors are making this period especially challenging. The demand shock from COVID-19 is pressuring prices in the short-run. Over the long-term, the electrification of transportation could permanently crimp demand. On the supply side, U.S. producers have (re)learned that Saudi and Russian competitors view shale as a threat. If U.S. crude exporters are to thrive in this fierce competition, they will need to lower costs however they can. Lower unit costs through VLCCs is a start.