By Janet McGurty
NEW YORK, April 4 (Reuters) – In 1902, the S.S. Paraguay set
sail from Texas carrying the first shipment of 400,000 barrels
of oil from the Spindletop field to a new refinery on the
Delaware River.
The Pew family, which had large holdings in Texas, built the
plant to help absorb the gusher of crude that had unexpectedly
emerged in east Texas, which lacked refining capacity and
sufficient demand for the fuel. The Marcus Hook, Pennsylvania
plant, perched at the tip of a spit of land, would provide both.
Amid another U.S. oil market upheaval more than a century
later, the roles are reversed: a new kind of oil from Texas and
North Dakota may rescue some East Coast refiners from the brink
of oblivion, providing a local alternative to the costly
imported crude that had threatened to put them out of business.
While it appears too late to spare Marcus Hook, which has
been shuttered since December, evidence of new buying interest
has emerged this week for two other major plants, potentially
saving the Northeast region from a summer fuel squeeze that had
unnerved politicians all the way to the White House.
Sunoco Inc, which owns Marcus Hook, received a
handful of bids this week for its 335,000-barrels-per-day (bpd)
Philadelphia refinery, the region’s biggest, sources familiar
with the bidding process said. It has threatened to shut the
plant if not sold by July 1.
One of those bidders is counting on the boom in light, sweet
shale oil to help resuscitate the ailing sector, which has been
squeezed between costly, imported light crude, falling gasoline
demand and new, more sophisticated overseas rivals.
Preferred Sands LLC, which has grown in five years to become
the third-largest supplier of sand and proppants to the
hydraulic fracturing industry, touts its deep connections in the
shale patches of Bakken, North Dakota, and Eagle Ford, Texas,
plus more than 1,500 rail cars with connections to major
railroads.
“We will continue to run it as a refinery and use our
substantial logistics experience and leverage our oil industry
knowledge,” said Mike O’Neill, founder and chief executive of
Preferred Unlimited, the parent company.
ConocoPhillips’ 187,000-bpd Trainer refinery, also
for sale, is said to have attracted some interest.
The sales have become charged on a political level over
potential job losses and regional fuel shortages. But concerted
efforts of federal and local legislators, union workers and
others may now be paying off.
“It’s gratifying to know that there are serious,
well-financed prospects to purchase the Philadelphia refinery,”
Pennsylvania Senator Bob Casey said. “I also know Mike O’Neill
to be a successful and sophisticated entrepreneur.”
BY LAND OR BY SEA
The Marcus Hook, Trainer and Philadelphia refineries were in
many ways casualties of the surge in U.S. shale oil production,
an unexpected boon that emerged from the hydraulic fracturing
technology first applied to natural gas fields.
As production in landlocked North Dakota and Canada surged,
crude prices plunged in the Midwest, giving refiners there a
profit advantage that allowed them to chip away at the East
Coast market. Some of that oil made it as far south as Louisiana
and Texas by rail, but little of it moved east.
But late last year, Sunoco and Conoco tested light, sweet
Bakken crude from North Dakota at their plants, with an
estimated 10,000 and 20,000 bpd of Bakken oil railed to Albany,
New York and then barged down to Philadelphia, traders said.
However, Lynn Elsenhans, then Sunoco’s chief executive, said
in November that Sunoco Logistics lacked the assets to
bring enough crude east to make it economical.
Enter Preferred, which says its train connections give it a
leg up over other bidders. It already hauls tonnes of sand or
silica from plants in Nebraska and Arizona to the shale patches
in other states, where the “proppant” is injected into wells to
allow oil and gas to flow out.
That diet of cheaper, domestic crude would help the
Philadelphia plant wean itself away from the Angolan, Azeri,
Nigerian and Norwegian oil that is now its mainstay — and which
costs some $20 a barrel more than U.S. benchmark West Texas
Intermediate and $35-plus more than North Dakota’s Bakken
crude, according to Reuters data.
In January, Sunoco imported 10.3 million barrels (about
343,000 bpd) of crude from those countries, U.S. government data
shows, enough to run the Philadelphia refinery.
“Any drop of midcontinent crude which replaces Brent is a
drop in the right direction,” said Mark Routt, senior analyst
with Houston-based KBC, a refinery consultancy.
HIGH-QUALITY BOOM
Oil output from U.S. shale oil plays will top 800,000 bpd by
2016, according to estimates by energy consultancy Bentek
Energy, doubling over four years. While initial results from
five Utica shale wells last year in Ohio disappointed some
analysts this week, that is unlikely to dim enthusiasm
substantially for the sector.
It’s not only about quantity. So far, the major shale oil
crudes are light and sweet, increasingly a poor match for
geared-up Midwest and Gulf Coast refiners that have invested
billions of dollars to run cheaper, heavy grades — but a
godsend for the simpler plants on the East Coast.
Despite less-than-stellar initial results, Bentek executive
Jim Simpson points out that the Utica formation is only 200
miles (320 km) west of the East Coast refineries.
“Can the refineries be saved or is there too much of a
disconnect?” said Simpson, who added that Utica crude with its
35 degree API — a measure of density — was a good match for
East Coast appetites.
“It depends if the Utica comes online fast enough. It might
make sense to spend the money on the refineries if you knew you
had secure supply of crude at a WTI price,” Simpson said.
Another shipping option comes from the north.
Canadian pipeline giant Enbridge Inc is mulling the
reversal of a 240,000-bpd Montreal-to-Sarnia line to carry oil
sands from the west. The reversed Line 9 would then feed the
Portland pipeline, which could carry shale oil from Montreal to
Portland, Maine and onto tankers where it could be shipped down
the coast.
Still more may come by sea, retracing the S.S. Paraguay’s
voyage 110 years ago.
At least 100,000 bpd of Eagle Ford shale oil will reach the
port of Corpus Christi this summer as new pipelines come
onstream, allowing oceangoing barges to carry 100,000 to 150,000
barrels each or small ships carrying 300,000 barrels to the Gulf
and East coasts.
“Eagle Ford shale, and the other shale oils like Bakken,
Niobrara, will make winners out of the U.S. refining industry as
a whole,” said John Auers, senior vice president of
Houston-based refinery consultants Turner Mason.
(Additional reporting by Bruce Nichols in Houston and Tim
Gardner in Washington; Editing by Jonathan Leff and Dale Hudson)
