HOUSTON (Dow Jones)
A newly approved refinery expansion may provide the latest option for processing Canadian crude.
Motiva Enterprises LLC's decision to double the size of its Port Arthur, Texas, refinery provides an outlet capable of handling an additional 325,000 barrels a day of heavy, sour grades of crude.
Final approval of the $7 billion expansion was announced Friday, after more than two years of deliberations by the joint venture's co-owners, Royal Dutch Shell PLC (RDSB.LN) and Saudi Arabia's state-owned oil company, Saudi Aramco.
"Certainly they were looking at that expansion for a long period of time, and I guess from a supply standpoint, perhaps the Canadian piece folded into that," said Steve Fekete, Calgary-based senior principal with consultancy Purvin and Gertz.
In the short term, pipeline service to the Gulf Coast from Canada is somewhat limited. To serve Motiva's expansion would require nearly the entirety of a pipeline, Feteke said. However, in the long term, Canadian crude may be a viable option.
Earlier this year, Shell acquired full ownership of Shell Canada, which had operated fairly independently, despite the oil major's majority role. The company operates an oil sands business unit with production in each of Alberta's three main oil sands deposits. While some producers have found it difficult to refine the heavy crude extracted from oil sands, Shell may have a ready customer in its Motiva venture.
"The refinery has been designed for maximum crude flexibility," said Motiva Chief Executive William Welte. "We can run anything that is out there."
Motiva intends for the refinery to get about half of its crude from each of its owners, Welte said. Shell's crude is likely to come from several of its ventures, including its oil sands projects in Canada and its Gulf of Mexico operations, he said.
Placing Canadian Crude
Canada, already the largest exporter of crude to the U.S., may see production from its Alberta oil sands tripling to 3 million barrels a day by 2015. With such large capacities expected to come online, producers are facing increasingly complex options of where to put the oil.
Shell's Athabasca Oil Sands project, which it operates jointly with Chevron Corp. (CVX) and Marathon Oil Corp. (MRO), may expand its ability to extract the heavy oil beyond its capacity to upgrade it into more usable products, Feteke said.
Shell has considered building a refinery at Sarnia, Ontario, according to earlier reports, but the plans have not been finalized. If such a refinery were built, it could receive oil from Alberta by pipeline.
Sending the crude by pipeline to the U.S. West Coast was a popular idea several years ago. Although early discussions took place, the plans never materialized, said Purvin and Gertz's Feteke. "They never got committed shippers for that pipeline," he said.
The Gulf Coast, on the other hand, offers large refineries that are compatible with the Canadian crude, he said.
Many of the plants in Texas and Louisiana were originally designed to run grades of Mexican and Venezuelan crude, which require similar processing to those found in Canada.
Many prospects for shipping crude from Alberta to the Gulf Coast have been proposed, with most seen coming online around 2012. The proposals include a "high speed" pipeline, known as the AlTex pipeline, which could run from Alberta to Texas. Additionally, Enbridge Inc. (ENB), together with Exxon Mobil Corp. (XOM), is also looking into a new pipeline from the Patoka, Ill., oil storage and transportation hub down to the Gulf Coast. The pipeline would likely have a 400,000 barrels-a-day capacity and could be on-stream by the end of 2010, when Motiva's expanded refinery is supposed to be operational.
"When we look at it, just to place Canadian crude, especially synthetic crude, is going to take a new market, like the Gulf Coast," Feteke said. Analysts have suggested that Gulf Coast refiners' contracts with oil suppliers like Mexico and Venezuela are expiring, allowing the companies to act as free agents and secure crude from new sources, such as Canada.
Still, Feteke cautioned that Canadian crude volumes available to Gulf Coast refiners could be somewhat limited by new Midwestern refinery projects, which could delay a real benefit to the Gulf Coast - and the pipelines hoping to serve it - until about 2015.
Crude For Port Arthur
Yet the consideration of using Canadian volumes at Port Arthur may be surprising. The refinery has historically run primarily Saudi Arabian grades of crude, according to a person familiar with the plant's operations.
The decision for the expanded facility to process a total of 600,000 barrels-a-day of crude, sourced from both of its owners, suggests a departure from a common refining joint venture formula, in which one partner operates the refinery and another supplies the crude.
When Motiva's Members Committee, consisting of three representatives from each owner, approved the plan Thursday, it signed off on a project seen as benefiting from the ability to run a wide variety of crudes, beyond the Saudi grades currently processed at the plant.
Both parties approved the expansion - despite its increased price - because of the belief that large refineries would be the most successful in all margin environments, Motiva's Welte said.
The investment suggests that Saudi Arabia is willing to invest in refining capacity beyond that needed to run the Kingdom's domestically produced crude.
Copyright (c) 2007 Dow Jones & Company, Inc.