Recent CSIS report outlines main US oil infrastructure challenges

The US crude oil renaissance has created strong demand for expanded US transportation systems, resulting in five primarily challenges, a recent Center for Strategic and International Studies report concluded.

“Fundamentally, the US midstream infrastructure is changing in response to production volumes, locations, and quality. Between 2008 and 2013, 2.3 million b/d of production was added,” said Sarah O. Ladislaw, who directs CSIS’s Energy and National Security Program and is one of the report’s authors. “We also shouldn’t forget that Canada began increasing production from its oil sands activity, and Mexico is attempting to increase its production with major reforms.”

At a Feb. 26 event where the report was released, Ladislaw said that the primary US crude oil transportation challenges that have emerged include:

• Transportation safety, particularly crude-by-rail “which requires more policy attention and is beginning to be addressed.”

• The US Strategic Petroleum Reserve, primarily logistical and maintenance issues, and whether it needs to be reconfigured from its largely crude oil orientation.

• Crude exports, where there’s been a lot of work already framing it more as an economic than a security issue, but with political implications.

• Issues with the Jones Act, which was enacted for economic and security purposes, but which also has begun to create distortions in moving crude around the US.

• Climate change, specifically which US midstream oil transportation modes have the most impact on it.

“For the course of the year, we plan to take up those five issues in public forums,” Ladislaw said. “Even though we focused a great deal on the US, we think having a good North American infrastructure is important because there could be so much crossborder transportation. Taking a look from a strategic continental basis may provide us with better answers.”

The US Energy Information Administration is working with its counterparts in Canada and Mexico to reconcile import and export data on energy flows, including crude oil and natural gas, EIA Administrator Adam Sieminski said. “We would like to actually be able to show Canadian and Mexican energy infrastructure,” he told the audience at CSIS. “We’re also looking at possibly comparing outlooks in the three countries, starting with definitions. For example, what is condensate?”

Sieminski said while lower crude prices will have some impacts on US crude exploration and production, it’s important to remember that they won’t be around forever. “When you’re forecasting oil prices, the opportunity to be wrong is very high,” he said.

He said EIA anticipates global crude demand growth in 2015 will be about 1 million b/d, while North American production is expected to climb by 2 million b/d. Some reduction in tight-oil output is possible, but production from oil sands and deepwater both involve fairly steady rates following major up-front costs, Sieminski said.

“The market is saying prices could be as low as $30/bbl and as high as $100/bbl over the next year,” he said. “What could possibly make it climb that much? We know that Venezuela is in pretty bad shape, with about 800,000 b/d of exports. If ISIS figures a way to disrupt Iraqi oil exports or social unrest in countries like Nigeria affects exports, prices could go up. There also could be an impact if unplanned outages come back in Libya.”

Global crude prices also could stay low in 2015 if economic activity in China and other industrializing countries stays sluggish, if Saudi Arabia decides to defend its market share by matching other Organization of Petroleum Exporting Countries’ production levels, or if a nuclear accord with Iran is reached, sanctions are removed, and its production ramps up, Sieminski said.

Problems with regulation

“Over the last 4-5 years, there’s been enormous production growth both in Canada and the US. That needs to be accommodated in infrastructure,” noted Harry Vidas, a vice-president at ICF International. “The industry has been exceptionally capable in building it to transport supplies to markets. Where it has problems is in government regulation.”

There has been a shift not just in where North America’s new crude production is occurring, but also the directions in which it is being shipped and how it has pushed out some imports, Vidas said. “Most of the production increase has been in the central part of the North America from Alberta down to Texas,” he said. “More Canadian oil is coming into the US to the Midwest and Gulf Coast.”

In the last 5 years, about 940,000 b/d of rail off-loading capacity has been built on the East Coast to accommodate light crude from US tight oil formations, pushing out about 90% of what refineries there used to import from overseas, he said.

New crude-by-rail regulations are due in May from the US Pipeline and Hazardous Materials Safety Administration, according to Vidas. He said ICF, in a report it did for the American Petroleum Institute, projected a large increase in crude-by-rail transportation, especially if the Keystone XL crude pipeline continues to be delayed.

This could create a shortage of new rail tank cars, he warned. “On the other hand, production has fallen with lower prices,” Vidas said. “We don’t see the same pressure we saw 6 months ago and the leasing rate for cars has come down.”

He said there has been a huge substitution of North American crude from Alberta’s oil sands and the Eagle Ford shale and Permian basin for imports from overseas along the US Gulf Coast. “Corpus Christi has emerged as an important Eagle Ford hub,” Vidas said. “It also has been becoming a trans-shipping area for the oil, part of it by barge into Houston markets and about 400,000 b/d up the East Coast to Canada.

Bypasses US East Coast

“None of that oil is being dropped off to US East Coast refineries because the Jones Act makes it too expensive,” Vidas said. “If the US decided to allow crude oil exports to other countries, Corpus Christi and Houston would be natural locations.”

Governments will have a major role in North America’s oil and gas future, asserted Kevin Book, managing director at Clear View Energy Partners and one of the report’s authors. “It’s easy to talk about Canada, Mexico, and the US as an integrated energy market,” he said. “But every country has different fundamentals, and policy processes tend to be independent. Energy politics also is increasingly local.”

Book said Mexico’s per capita energy consumption is rising, while the other two countries are going down, but the US and Canada consume much more. “All three of our economies are becoming more energy-efficient, but Canada and the US are moving faster,” he said. Canada’s energy intensity within its gross domestic product is quite high.”

The three countries also have different energy regulatory structures, with Canada’s strong provincial presence making federal activity secondary and Mexico’s strong federal regulation as its state oil monopoly tries to restructure itself, Book said. “You’re going to have trouble getting to integration based on these fundamental operating and policy differences,” he predicted. “They’ll also set up some interesting dynamics.”

Climate change concerns also will drive oil and gas infrastructure decisions, particularly with pipelines to transport gas to power plants and efforts to reduce flaring, Book said. “We are at a point in our history where we’re asking federal agencies which look at infrastructure about life cycle greenhouse gas implications,” he said.

“This is new terrain. For some infrastructure systems, it may not be much of a problem. For others, there will be a higher burden of proof,” Book said. “The prototype of all this, ironically, has been the Keystone XL pipeline where the State Department used the [National Environmental Policy Act] process for the first time in considering a cross-border permit application.”

Contact Nick Snow at [email protected].