U.S. Midwest oil refiners boost output,
cut region's dependence on Gulf Coast
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[October 23, 2017]
By Jarrett Renshaw
NEW YORK (Reuters) - U.S. refineries from
Ohio to Minnesota are capitalizing on access to cheap crude from Western
Canada and North Dakota oilfields, helping their region break a historic
dependence on fuel from the Gulf Coast while redrawing oil trade maps.
Since the early 2000s, crude and fuel flows from the Gulf Coast into the
U.S. heartland have been cut in half, as crude coming from Canada and
North Dakota has pushed U.S. Midwest refining activity to record levels.
In 2016, Midwest refining capacity rose to 3.9 million barrels per day
(bpd) of crude, the highest annual volume on record.
Midwest refiners such as Marathon Petroleum Corp, Phillips 66, BP PLC
and Husky Energy have invested billions of dollars on new units capable
of turning sludgy crude from Canada into gasoline and diesel.
Investments in the Dakota Access Pipeline and other avenues have helped
bring in shale oil from North Dakota.
"Ten years ago, we were 1 million barrels per day short on products,
with the Gulf Coast supplying the product. Today, the midcontinent is
flush with products," Marathon Petroleum Chief Executive Gary Heminger
said in a recent Reuters interview at the companyís Findlay, Ohio,
Yet analysts warned that weakening U.S. gasoline demand will make it
challenging for Midwest refiners to sell their growing output. The
Midwest is land-locked, making it hard to get products to new markets,
especially as rival refiners defend their turf. Philadelphia area
refiners are currently fighting efforts to reverse a pipeline so Midwest
companies can move fuel to western Pennsylvania.
(Graphic: Midwest Breaks Free of Gulf, Looks North Instead:
For years, Gulf refiners with access to cheaper crudes could underprice
their Midwest rivals in Chicago, Indianapolis and other cities in the
region. Traders made easy money sending gasoline north in the summer.
Now, Midwest plants can compete more effectively thanks to booming
production in western Canada and North Dakota of crude that routinely
sells at a discount against the U.S. benchmark price.
"The Midwest is well positioned to supply its region and parts of
southern Canada, and will even have excess supplies to send to the East
Coast. Itís in a good spot," said Mark Routt, chief economist at KBC
At the turn of the century, the Midwest received 3.4 million bpd of
crude and refined products from the Gulf. In 2016, that figure was
halved. Chicago gasoline peaked at a premium of 14 cents a gallon versus
the future contract this summer, much less than the summer premiums of
nearly 40 cents in 2014 and 2015.
"The trade was as slow as I've ever seen it," said one scheduler who
sends barrels along the line.
Hurricane Harvey knocked out half of the Gulf's capacity, while Midwest
refiners processed a record 4.06 million barrels per day (bpd) of crude
oil in late August and early September, 12 percent more than the 2016
The Rockies, which includes Bakken oil fields, sent 550,000 bpd to the
Midwest last year. That is triple the volumes seen in 2010 before Dakota
Access opened. Phillips 66 and Marathon Petroleum are minority partners
in the line, which opened in 2017 and can pump as much as 525,000 bpd.
[to top of second column]
The Phillips 66 gas station in Superior, Colorado, U.S., July 27,
2017. REUTERS/Rick Wilking
Canada has sent an average of 2.1 million bpd of crude through June
of this year, more than triple the rate from two decades ago,
according to EIA data.
SPENDING ON UPGRADES
Midwest refiners invested billions of dollars to handle the heavier
Canadian crude. For instance, Marathon and BP spent over $6 billion
to install new coking units to handle the heaviest parts of the
Marathon's 144,000 bpd Detroit refinery nearly tripled its usage of
Canadian crude last year, hitting a record high of 137,400 bpd, EIA
data showed. BP's 430,000 bpd Whiting, Indiana, refinery can now
process up to 85 percent heavy crude, up from 20 percent before the
But analysts predict that ebbing U.S. gasoline demand will
eventually force Midwestern refiners to find other markets,
including exports. To facilitate this, some pipelines that used to
carry product to the Midwest have already been reversed. But
Philadelphia-area refiners are pressuring state regulators to reject
reversal of a pipeline that would bring Midwest fuel to the
The owners of the 1.2 million bpd Capline Pipeline, the nation's
largest crude pipeline by volume, will soon gauge shipper interest
in reversing that line, which currently runs from Louisiana to
Illinois. The line is owned by Marathon, BP and Plains All American,
and the group said reversal would not come until 2022.
Shippers abandoned the line in recent years due to the waning
financial incentive to move barrels north. But BP, which has an
ownership interest in the pipeline, has slowed the reversal over
concerns that it could erode the discount on Canadian oil enjoyed by
its Whiting refinery. BP did not respond to questions about that
Analysts expect regional market-share battles to intensify. The
Midwest will go from being short roughly 500,000 bpd of gasoline
this year to a surplus of roughly 200,000 bpd by 2030, according to
Wood Mackenzie refinery analyst Andrew Shepard.
A gasoline supply glut would pressure prices and weaken profit
margins for refiners, Shepard said. Eventually, Midwest refiners
will have to close plants if they cannot access new markets.
"The Midwest must gain increased access to the East Coast market,"
(Reporting By Jarrett Renshaw; Editing by David Gaffen and David
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