Enbridge Inc.’s purchase of a 50% stake in the Seaway oil pipeline and the reversal of crude oil flows from Cushing, Oklahoma to the Gulf Coast will not, in Fitch Ratings’ view, end the need for additional investment in similar projects. However, Fitch believes it will significantly ease the supply bottleneck at Cushing, Fitch reported on Nov. 17.
“While the reversal is likely to support prices for landlocked West Texas Intermediate (WTI) crude and cut high inventories at Cushing, strong North American production growth and solid demand for pipeline capacity to Gulf Coast refineries should continue to support new project development,” Fitch said.
Fitch expects the race to build new pipeline capacity will continue as TransCanada awaits approval for Keystone XL pipeline, which would link Canadian oil sands production areas with Texas via the terminal at Cushing. The State Department said a new route will be needed due to environmental concerns, pushing back the approval to early 2013. However, TransCanada may pursue fast-track approval of the Cushing to Gulf Coast portion of the project, Fitch said.
While the Nov. 16 announcement about the Seaway reversal drove a significant jump in the WTI price and a narrowing of the WTI-Brent spread to less than $10 bbl, the need for significant alternative transportation capacity from Cushing to the Gulf is likely to spur continuing investment in trucking, barge and rail capacity to supplement pipeline flows, Fitch said.
Enbridge and Enterprise Products expect capacity for the reversed Seaway pipeline to reach 150,000 bpd by the second quarter 2012, and ultimately 400,000 bpd in 2013.
As the Brent-WTI spread narrows and the glut of midcontinent supplies is eroded, margins for Midwest refiners are expected to moderate from currently high levels. By contrast, beneficiaries of a narrowing Brent-WTI spread include upstream producers in landlocked North American basins, as their price realizations should rise relevant to the Brent Benchmark, Fitch reported.
Fitch Ratings is a global rating agency providing value beyond rating through credit opinion, research and data.