Texas Oil Sails to Canada, Refiners Fume Over Tanker Law
Oil traders including commodities giant Trafigura and Australian bank Macquarie have quietly begun shipping U.S. crude oil from Texas to Canada, raising the ire of U.S. East Coast refiners who may pay four times as much for a similar voyage.
In the latest oil trading trend to emerge from the unexpected boom in U.S. shale production, the firms have hired at least seven foreign-flagged tankers to run the route to Canada this year, most of them for the first time, according to market sources and data analyzed by Reuters.
U.S. refiners, however, are required by a shipping law from 1920 known as the Jones Act to use more costly U.S.-owned and operated ships if they want to tap into the oil bounty emerging from the Eagle Ford fields of Texas, highlighting the uneven playing field that is taking shape in the Atlantic basin.
Although the law itself has long been a bone of contention in the industry, the emergence in recent months of such a prominent example of how the Jones Act "penalizes" domestic firms is reopening old wounds, according to John Auers, senior vice president of refinery consultants Turner, Mason & Co.
"They're resentful of it, they think it's unfair - they've told me that," Auers said in an interview.
The trend was highlighted on Monday by U.S. government data showing crude oil exports to Canada leapt to a 13-year high of 124,000 barrels per day, double rates from last year. Much of that was in the form of shipments by rail, pipeline or barge, which have been steadily rising for months.
But that data did not include details on the mode of transport, masking the swift rise of seaborne traffic.
The latest such cargo is aboard the Everglades, which loaded a 500,000-barrel cocktail of light, sweet crude in Nederland, Texas late last week. The tanker, Macquarie's first U.S.-to-Canada shipment, on Tuesday was rounding Florida en route to the Come-by-Chance refinery in Newfoundland, which is now run by South Korea's national oil company.
Others moved sooner. Suncor Energy, Canada's biggest oil and gas producer, shipped one cargo to its refinery in Montreal, Quebec in late February; privately held Irving Oil has also imported some crude from the Gulf Coast to its plant in St. John, New Brunswick, according to analysis of export data gathered by port intelligence group PIERS.
While the exports to Canada are perfectly legal (provided the exporter has a license from the U.S. Department of Commerce), they are shining a spotlight on a vexing market anomaly: one created not by gaps in energy infrastructure like the pipeline shortages that made winners out of Midwest refiners, but by a nearly century-old regulatory legacy.
"The refiners who happened to have plants in North Dakota or Utah just got lucky, that's the free market," said Auers. "But here's a federal law that basically rewards your foreign competitors -- that's how the refiners look at it."
Pressure on lawmakers is building, particularly from firms that also face higher costs moving U.S. fuel into the Northeast.
"I hear there is talk in Washington about modifying the Jones Act," Joe Petrowski, chief executive of oil retail and wholesale group Gulf Oil, said on CNBC last week. "If that happens it would be very good news for the industry."
Refiners including Delta Air Lines unit Monroe Energy, which bought a plant in New Jersey last year, and Philadelphia Energy Solutions declined to comment. PBF Energy and Phillips 66 report earnings this week.
The Jones Act requires any voyage between U.S. ports to be on a U.S.-flagged, built and manned vessels. Supporters say it has protected U.S. maritime jobs since it was first introduced, and supported prices for owners of U.S.-flagged vessels.
Only around three-dozen such tankers now exist, and most of those are already busy on routine routes. That leaves little spare capacity to exploit the new Gulf-to-East Coast voyage.
The average cost for a Jones Act compliant vessel to sail from the Gulf Coast to the East Coast is around $70,000 a day, according to shipping sources, almost four times the $16,000 a day it costs for a foreign-flagged tanker sailing to Newfoundland, scarcely a day's longer journey.
Although U.S. law bars exporting domestically produced crude as a matter of course, the Commerce Department generally approves special permits to sell crude to Canada - provided that oil returns to the United States in the form of fuel.
That may only serve to infuriate East Coast refiners even more, since they must directly compete with imported Canada-made gasoline or diesel in the New York Harbor market.
At the margin, the higher cost of shipping crude to Canada -- and then re-importing the product -- gets passed on to motorists. Meanwhile U.S. East Coast refiners are either paying higher freight rates, using costlier railway lines to bring in North Dakota shale or importing crude from West Africa or Europe at a premium of up to $15 a barrel to U.S. grades.
Gulf Oil's Petrowski said the law could be adding as much as 10 to 15 cents per gallon to the cost of gasoline by raising the cost of shipping up Gulf Coast fuel.
Refiners can point to one recent precedent in calling for relief: As the Northeast battled severe fuel supply disruptions in the wake of Hurricane Sandy last October, the Department of Homeland Security issued a blanket waiver of the Jones Act to help increase deliveries into the region.
Over the next month more than 3.2 million barrels of gasoline and diesel was shipped into the Northeast by a total of nine companies, before the waiver expired.
Those waivers were critical in part because a half-dozen refiners along the Atlantic coast have shuttered since 2008 due largely to low margins, cutting the region's capacity by around 1.2 million bpd.
But opponents of the law were disappointed last month when the U.S. Government Accountability Office issued a long-awaited report on the impact of the Act on Puerto Rico, saying the benefits of modifying the law were "uncertain".
Trafigura leads the charge
Tanker brokers say at least seven such shipments have been booked on the spot market so far this year, up from less than half a dozen in all of 2012.
The leading shipper so far has been international commodity giant Trafigura, which shipped two such cargoes to Canada at the start of this year from a converted oil terminal in Corpus Christi, Texas, to Come by Chance, according to the PIERS data, which was made available to Reuters.
Trafigura has stolen a lead on shipping seaborne crude from the Eagle Ford development since buying the Texas Dock & Rail storage terminal last year, giving it rail and truck offloading facilities and a deep tanker loading facility.
Production from Eagle Ford has more than trebled since 2011 to reach almost 470,000 bpd in the first two months of the year, according to state data released this month.
Trafigura declined to comment on specific shipments, but said the firm has a Department of Commerce license to export crude from the United States to Canada.
Others are also involved. Royal Dutch Shell shipped crude last November from Louisiana to St John, according to the PIERS data. Irving Oil has also been importing North Dakota crude by smaller tankers from Albany, New York.
And Macquarie is also now getting into the business directly, hiring its own ship to deliver U.S. crude to Come by Chance. The Australian bank, a growing player in the physical oil market, has a deal to supply crude and export fuel from the refinery, owned by Korea National Oil Corp (KNOC) subsidiary Harvest Energy.
Foreign firms aren't the only ones benefiting from the trade, however. Valero, the largest independent refiner in North America, processed its first cargo of Eagle Ford crude at its Quebec refinery in April.
Although the cost of the crude was comparable to other sources, the refinery yield was "better than what we had anticipated," Valero Chairman Bill Klesse told analysts on Tuesday. Valero's export license allows it to ship as much as 90,000 bpd of U.S. crude to Canada, and the firm hopes to run exclusively North American crude in all its plants within a year.
And for the moment Valero has little reason to complain about the Jones Act: Klesse sold his last refinery on the U.S. East Coast three years ago.