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Seaway pipeline sends oil to Texas

21st May 2012

Oil producers and Gulf Coast refiners expect profits to improve after oil sent to Texas in historic shift

500 mile pipeline feeds crude back to Texas

The Seaway pipeline has begun pumping crude oil from Cushing, Oklahoma, to the heart of the US refining industry in Houston, marking a historic shift in the way oil flows across the US. 

The first barrels went into the line on Saturday and volumes were expected to increase within days to 150,000 barrels per day (bpd), Reuters reported. Enbridge Inc is a 50 per cent partner in the project.

The start-up is the first direct link from Cushing to the Gulf Coast, the biggest US refining centre. Cushing is the delivery and storage point for the US benchmark oil futures contract, which represents a blend of crudes from the Midwestern states. It has been landlocked in Cushing and steeply discounted to world prices as a result.

The average motorist will not see much, if any, difference in gasoline pump price but oil producers and Gulf Coast refiners expect profits to improve. Many argue the reversal is the start of a trend toward reduced U.S. dependence on crude from the Middle East and elsewhere overseas.

Historically, the 669-mile (1,077-km) Seaway system had flowed from the Gulf Coast to Cushing, carrying crude oil from South Texas, but had been underutilized recently.

The first oil will take 12 days to reach Houston, 550 miles (885 km) south of Cushing, but market anticipation of the event already has lifted inland crude prices in North America, although analysts disagree how much and how fast prices will change with the reversal of Seaway.

The spread CL-LCO1=R between U.S. benchmark West Texas Intermediate and global benchmark Brent, similar crudes historically priced at near parity, narrowed to $15 from almost $19 Wednesday. It was as much as $28 late last year, costing US and Canadian oil producers billions but boosting profits for Midwestern U.S. refiners.

The Seaway pipeline, which goes to Freeport and Houston, opened in 1995 with a south-to-north flow. A surge in Canadian oil sands output and US shale oil production, however, has rendered the south-to-north flow unnecessary.

Interest in reversing Seaway to flow north-to-south intensified in the past 18 months as Cushing inventories surged and NYMEX WTI fell to unprecedented discounts. Cushing stocks hit a record 45 million barrels last week.

Last fall, ConocoPhillips sold its 50 percent interest in the line to Enbridge, which then agreed with co-owner Enterprise to reverse Seaway. It has taken several months of work on pump stations to bring the plan to reality.

A new pump station is under construction at the Cushing end to allow flows to reach 400,000 bpd in early 2013. Ultimately, Enbridge and Enterprise plan to more than double the line's capacity to 850,000 bpd.

That and other planned pipeline projects, along with rail and barge transportation of crude, will be required to ease the Midwestern oil oversupply more fully and permanently, most analysts have said.

"One theory is that once barrels start moving out of Cushing and the pipeline expands to 300,000 or 400,000 bpd by early 2013 the spread will narrow. We're seeing some of that," said Tom Bentz, director of BNP Paribas Commodity Futures in New York.

"The other theory is that even though crude is moving out, there is still more coming into Cushing due to increased Canadian and U.S production. Also North Sea (Brent) production problems will keep the spread very wide," Bentz said.

Analysts had mixed opinions whether the first crude down Seaway would be light sweet or heavy sour or a mix. The type of oil makes a difference to refiners as well as pipeliners. Much of the stored oil at Cushing is now Canadian heavy sour

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