The off-the-table drop in crude oil prices, coupled with producers in North America pretty much keeping production steady—at least until price hedges run out mid-year—begs a very important question: With demand remaining somewhat lackluster, what are we, as a nation, going to do with all this crude?
One answer is found surrounding a proverbial sleepy little town in Oklahoma, known as the “Pipeline Crossroads of the World.”
Cushing, OK, is home to the nation’s largest oil storage facility, a massive complex of tanks and pipes capable of holding more than 80 million barrels of crude.
The town also is the price point for domestic benchmark West Texas Intermediate (WTI) crude.
Can Cushing Handle the Glut?
Can Cushing handle the continuing inflow of crude, which has been pushing roughly 2.2 million barrels per day (MMBPD)? Three experts recently addressed the question/problem during a webinar sponsored by Genscape and monitored by Shale Energy Business Briefing (SEBB).
The trio, including Brian Busch, Director of Oil Markets & Business Development, Genscape; Rusty Braziel, Founder, RBN Energy; and Dominick Chirichella, Founding Partner, Energy Management Institute; likes Cushing’s ability to handle the glut at least into May—and then excess crude will flow to the 75 million barrels (MMBbls) of US storage located outside north-central Oklahoma.
“Companies are putting 2.2 MMBPD into storage at Cushing and, today, the 86 million barrels of storage there is about half-full right now,” Genscape’s Busch said.
At Feb 13, Cushing’s storage tanks held roughly 46.3 MMBbls of crude, according to the US Energy Information Administration (EIA).
The stored oil is worth almost $2.4 billion even at today’s depressed prices, and the companies that own the crude hope it will be worth much more. The oil market is in contango, which means oil delivered in the future is worth significantly more than oil delivered today.
At the current fill rate, and assuming 80% is Cushing’s operational capacity, the world’s pipeline crossroads could choke on in fewer than two months, according to Busch, reaching roughly 68 MMBbls.
“I don’t think that will happen; I don’t think we’ll continue to fill at that rate,” Busch said. “But I do think it [capacity] will happen by mid-May.”
Operational capacity is the amount of crude that can be stored without interrupting the hub’s ability to blend and transport oil throughout the region.
Crude Flows to Other Venues
Once Cushing storage fills, look for production to fan out, flowing to Patoka, IL (7.4 MMBbls of total storage), West Texas (9.2 MMBbls) and the Texas Gulf Coast storage trio of Houston (25.1 MMBbls), Corpus Christi (7 MMBbls), and Nederland-Beaumont (19.8 MMBbls of storage capacity).
The St James Parish area in Louisiana adds another 14.3 MMBbls of storage, while LOOP, the Louisiana Offshore Oil Port, offers an unknown amount of capacity, according to Busch.
Operational capacity for the 75 MMBbls outside Cushing could occur by year’s end, SEBB understands.
If the country reaches total storage capacity and production continues to outstrip demand, prices could tumble, Busch said.
Varied Production Scenarios
On the way to perhaps filling Cushing’s storage, RBN’s Braziel sees three production scenarios moving forward.
In his “growth scenario,” production maintains volumes growing for the next two years, at which point demand responds to low prices and WTI prices return to the $80/Bbl range by 2017.
“This is the pre-[price] crash scenario. Prices are good enough for producers to make money from wells they made money from pre-crash,” Braziel said.
In a “cutback scenario,” production keeps growing in a few basins, but production in many basins is flat. There is a modest demand response, and WTI returns to the $70/Bbl price range by 2020.
In his “contraction scenario,” Braziel sees production continuing to grow in 2015, but eventually falls back to 2014 levels (roughly 9 MMBPD). Demand doesn’t respond and WTI prices trade in the $50/Bbl to $60/Bbl range through 2020.
Remember early on we mentioned production will continue until price hedges fall off? Braziel offered other reasons why he believes even with lower breakeven prices, production remains resilient.
“Wells in development and those drilled but not completed will be brought online,” according to Braziel. “Producers need the cash.”
Even with producers cutting-back on drilling, rigs that are still working are focused on play sweet spots. Exploratory wells will be eliminated, leaving only those wells likely to maximize returns—by maximizing production volume, Braziel said.
“Producer economics will be improved by lower drilling service costs, which are rapidly declining in response to lower drilling activity,” according to Braziel.
History Repeats Itself
Storage levels in Cushing held near operational capacity throughout much of 2010 and 2011, as domestic producers produced more oil than existing pipelines could handle.
Since 2011, a series of new and expanded pipelines has tripled capacity, allowing oil to drain from the Cushing hub. Cushing storage levels actually dipped below 25% of capacity last summer.
Storage Construction Boom Ongoing
Another potential benefit to Cushing is storage construction. The near-capacity storage levels in 2010 and 2011 led companies to rapidly expand storage capacity to more than 80 MMBbls today, up from 50 MMBbls in 2009.
Another 1.8 MMBbls currently is under construction, and that number could increase again if storage levels remain high.
Genscape’s Busch described his perspective on what the future holds from a crude storage perspective.
“OPEC blinks, or instability in a crude-producing country[s] results in a cut to global supply,” Busch said. “Taking 1 MMBbls out of supply would get us out of the [storage] problem quickly.”
Global economic growth (demand) picks up, particularly in China and the European Union, increasing the demand for crude.
There also is the “storage hangover” scenario possible in the future, Busch said. “The more [storage] we build, the more we have to run off stored barrels before it affects market prices,” Busch said. “This tends to continue to put downward pressure on prices, delaying increases in production relative to actually demand longer than desirable.”
The delay in new production results in supply concerns, which leads to a return to the boom cycle.
“The worst-case scenario is to have to wait for domestic E&P (exploration and production) companies to go to the sidelines, causing production to fall,” Busch said.
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