April 12, 2023 [RBN Energy] – If you think, as we do, that (1) U.S. crude oil production is likely to increase by 1.5 to 2 MMb/d over the next five years, (2) almost all those barrels will be light-sweet crude that needs to be exported, and (3) exporters will overwhelmingly favor the marine terminals that can accommodate Very Large Crude Carriers (VLCCs), it would be hard to ignore the game-changing impacts that Enterprise Products Partners’ planned Sea Port Oil Terminal could have.

SPOT, which could be completed as soon as 2026, will have robust pipeline connections from the Permian and other shale plays and be capable of fully loading a 2-MMbbl VLCC in one day, enough to handle virtually all the incremental exports we’re likely to see over the next five years. In today’s RBN blog, we discuss the fast-increasing role of VLCCs in U.S. crude oil exports and the potentially seismic impacts of the SPOT project.

RBN’s middle-of-the-road “Mid” forecast sees U.S. crude oil production increasing to 14 MMb/d by 2028, about 2 MMb/d higher than the 2022 average, with three-quarters of that incremental output coming from the Permian and most of the rest from other shale plays that also produce high-API-gravity, low-sulfur oil — see The Price You Pay for more (and a downloadable MS Excel version of that forecast). Given that U.S. refineries’ ability to economically process light-sweet crude is essentially maxed out, it’s a good bet that almost all those incremental barrels will be bound for export terminals along the Gulf Coast.

And, as we said in Calling the Shots, it’s just as likely that, on their way to overseas refineries, as many of those barrels as physically possible will be headed through terminals like the Enbridge Ingleside Energy Center (EIEC) and South Texas Gateway (STG) — both in the Corpus Christi area — whose docks can receive and load VLCCs with minimal reverse lightering, the most cost-effective way to move massive volumes of oil to Europe and Asia.

But crude oil pipelines from the Permian to Corpus are nearing capacity, more oil is being diverted toward Houston-area export terminals across Magellan’s pipelines, the Midland-to-ECHO pipeline system and other pipes — see Sooner or Later and Houston Bound for more on that — and Enterprise continues to advance its plan to build SPOT in 115-feet-deep waters about 30 nautical miles off the coast of Freeport.

Enterprise has estimated that it will have a full license for the project in hand by September 2023, and that it will take about 30 months to build the facility. In What It Takes, we explained that SPOT will have two single-point mooring buoys (purple-and-white-striped diamonds in Figure 1) and the ability to simultaneously moor two VLCCs and load one per day — providing an extraordinary level of cost- and time-efficiency.

Crude will flow to SPOT on a pair of 36-inch-diameter pipelines from two Enterprise storage-and-distribution terminals: the existing ECHO Terminal (orange tank icon southeast of Houston; 8.4 MMbbl of tank storage) and the proposed Oyster Creek Terminal (orange-and-white-striped tank icon north of Freeport; 4.8 MMbbl of planned capacity) in south-central Brazoria County.

During Enterprise’s March 29 analyst day, company executives said they expect the SPOT project will be underwritten by long-term contracts with a combination of large producers, crude oil traders and (to a lesser degree) “demand-pull” consumers overseas. They noted that the project has received a positive response from a number of prospective counterparties, and that SPOT’s capacity will not need to be fully contracted for the project to be sanctioned. Co-CEO Jim Teague added, “I personally believe that this is a project that needs to be built.”

He noted that SPOT will provide important environmental benefits, including a 95% reduction in crude vapor emissions and a 65% reduction in greenhouse gas emissions compared with the emissions generated by reverse lightering similar volumes of crude.

We don’t think you can overstate either the growing significance of exports to the U.S. crude oil market or the economic advantage that VLCCs provide — especially if they can be at least partially loaded at onshore docks.

The EIEC and STG terminals in Ingleside — across the bay from Corpus — can load more than 1.2 MMbbl onto VLCCs (and up to 1.6 MMbbl starting in late April when a channel-deepening project is finished), and SPOT, as we said, will be capable of loading VLCCs to the brim. Reducing (or, in SPOT’s case, eliminating) the need for reverse lightering — plus the economies of scale associated with using a much larger vessel (and VLCC charter rates that are currently comparable to the rates charged for much smaller Suezmax and Aframax tankers) — can significantly reduce the per-barrel cost of transporting crude oil long distances.

The stacked, multicolored bars in Figure 2 show the increasing number of oil-laden VLCCs leaving the Gulf Coast over the past couple of years — more than 30 per month, on average, since the middle of last year and a record 46 in March (stacked bar at far right). Subsets of these VLCCs are partially loaded at either EIEC (orange bar segments) or STG (green segments) — respectively the U.S.’s #1 and #2 crude oil export terminals by volume — before they are topped off via reverse lightering, while others are fully loaded at the Louisiana Offshore Oil Port (LOOP; purple segments) or filled entirely via reverse lightering in the deep waters of the Gulf (blue segments).

Before we discuss how SPOT will shake things up, we should note that while VLCCs are the go-to vessels for transporting crude oil to many large-volume European and Asian destinations, they are typically too big to use for shipping to other, smaller markets, including most of Latin America and Africa (and a number of ports in Europe).

And, of course, the docks at most port facilities around the world (including many in Europe) are not able to receive VLCCs due to their deep draft and other massive dimensions — at these locations, when VLCCs are used, they are idled in deep waters offshore and their cargoes ferried to docks using smaller tankers.

We also should point out that while LOOP remains the Gulf Coast’s only terminal capable of fully loading VLCCs, its location and pipeline connections make it a less likely point of departure for Permian and other light-sweet oils that dominate the export market. (LOOP does export considerable volumes of generally lower-API, higher-sulfur crude such as those produced in the offshore Gulf of Mexico.)

As SPOT is developed over the next three to five years, we expect that both EIEC and STG will take steps to protect and even expand their current, dominant shares of crude export volumes.

As we said a couple of weeks ago in From Here to There to You, Enbridge is currently building almost 2 MMbbl of additional storage capacity at its Ingleside terminal and pursuing a possible 200-Mb/d expansion to the 950-Mb/d Gray Oak Pipeline from West Texas to Corpus, in which the company holds a 68.5% ownership interest. (Enbridge became Gray Oak’s operator on April 1.) STG’s co-owners (Buckeye Partners, Phillips 66 and MPLX) are surely considering possible expansion plans of their own for that facility.

Assuming that SPOT comes online within Enterprise’s announced timeframe, we expect that, with its economies of scale and shipper commitments (which Enterprise is working on now), the terminal will quickly ramp up to full utilization, which would mean loading and sending out as much as 2 MMb/d. Similarly, we anticipate that EIEC and STG will continue to run at or near their capacities — according to RBN’s Crude Voyager Quarterly report, the Enbridge and Buckeye/P66/MPLX terminals have maximum observed 30-day loading rates of 950 Mb/d and 600 Mb/d, respectively.

(Those numbers are likely to rise over time.)

As for the smaller and midsize export terminals along the Texas coast, some — like local hardware stores competing with The Home Depot and Lowe’s — may well have a difficult time maintaining their existing volumes when SPOT joins the fray. Shippers using SPOT, EIEC and STG — plus LOOP in Louisiana — will be able to transport crude to most larger ports in Europe and Asia at discounted rates.

All will not be lost, however, for terminals that cannot accommodate VLCCs. For one thing, as export volumes increase, there will still be a need to transport crude to Latin America and other markets that are best served by Suezmaxes and Aframaxes. Also, there’s likely to be growing demand for export capacity for refined products (gasoline and diesel), LPG, and alternative fuels such as renewable diesel (RD) and sustainable aviation fuel (SAF), as well as “green” or “blue” ammonia, which can be used as carrier fuels to transport clean hydrogen, and some terminals may consider reworking their facilities to handle these commodities.

In any case, it seems clear that — assuming SPOT is built — non-VLCC terminals will need to be nimble and creative.

SPOT will be a game-changing development for sure, but it’s only one of many substantive changes ahead for U.S. crude oil and petroleum product export markets. To help make sense of what’s ahead, RBN will soon be bringing together the views of top executives engaged in these markets — midstreamers, private equity, producers, shipping companies, and other major players — along with RBN’s latest analysis on infrastructure, production and takeaway capacity. We call our conference xPortCon-Oil 2023. This is where data and experience come together to explain what you need to know about the next phase of development in U.S. exports.

xPortCon-Oil 2023 is scheduled for the Houstonian in Houston on June 8, 2023. There, we’ll review RBN’s latest market analysis on the different energy export markets and then discuss what industry executives are seeing in their businesses. The need for U.S. exports to meet global demand will be front and center, along with what has been happening to supply/demand balances in the U.S.

In addition to the whole RBN senior analyst team, we’ll be joined by Jim Teague, co-CEO of Enterprise Products; Scott Sheffield, CEO of Pioneer Natural Resources; Aaron Milford, CEO of Magellan Midstream; Brian Freed, CEO of EPIC Midstream; Tom Kloza, Global Head of Energy Analysis at OPIS; Tony Chovanec, Executive Vice President of Fundamentals and Supply Appraisal at Enterprise; and Sean Strawbridge, CEO of Port of Corpus Christi. All of these leaders have made significant contributions to U.S. export markets. Other folks participating in our conference will be announced over the next few days.

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