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Streetwise Professor

February 18, 2013

An Updated Calculation of the Value of Midcontinent-Gulf Pipeline Capacity

Filed under: Commodities,Economics,Energy,Regulation — The Professor @ 12:10 pm

A member of my vast, globe-straddling network of sources informs me that at this morning’s session of International Petroleum Week in London, John Kingston of Platts referred to my estimate of the economic surplus created by new pipeline investment.  That number is almost a year old, and Kingston’s mention prompts me to update that computation.

It is a basic welfare triangle calculation that depends on quantity-pipeline capacity-and price differences between LLS and WTI.  At present, the LLS-WTI spread is slightly north of $20/bbl.  The forward spread is above $7/bbl (and nearly $8/bbl) as far out as December 2015.  (These are based on settlement prices from CME Clearport.  There aren’t a lot of trades that far out, so those numbers have to be treated with some caution.  That they are in the ballpark of the forward Brent-WTI spread provides some confidence, but of course, CME might have used the Brent-WTI spread in calculating the settlement price for forward LLS-WTI spreads that didn’t trade.)

According to the EIA, there are 1.150 mm bpd of planned pipeline capacity additions from Cushing to the Gulf, and another 830 m bpd planned capacity additions from Permian to the Gulf (back in the day much Permian oil flowed into Cushing, so the Permian capacity additions are another way of easing the Cushing bottleneck)

Given the uncertainty about when that capacity will come on line, I will make a couple of calculations that will bound the value they create.

If all the capacity is expected to come online by December, 2015, the welfare gain is (.5)($20+$7)(1.98mm)-($2)(1.98mm)=$22.77mm/day.  (The $2 is an assumed marginal cost of transportation.)  Note that there is remaining value to adding even more capacity under these assumptions.  If Q additional bpd of capacity is required to drive the spread to marginal cost, the gain from adding this Q units of capacity is (.5)($7+$2)Q-($2)Q=$2.5Q.

If the capacity is expected to come on line sometime after December, 2015, and it is expected that the spread will go to marginal cost when it does, the value of the capacity is (.5)($20+2)(1.98mm)-($2)(1.98mm)=$17.82mm/day.

Big numbers.

It is possible to calculate a similar number for pipeline capacity going into the Midcontinent.  EIA reports that 1.19 mm bpd of capacity from Canada to Midcon is planned.   Western Canadian Select quotes are available via CME only through February, 2015, and are under -$20/bbl for the entire 2 year period: the nearby number is $-26/bbl.  I’ll make a WAG as to what the spread should be once the transport bottleneck is eliminated (because there are quality differences, and the distances are substantial, I don’t know off the top what that should be)-my WAG is $5/bbl.  That gives us (.5)($26+$5)(1.19mm)-($5)(1.19mm)=$12.5mm/day.  That number swings (.5)(1.19mm) for every dollar change in my WAG.

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4 Comments »

  1. [...] See full story on streetwiseprofessor.com [...]

    Pingback by An Updated Calculation of the Value of Midcontinent-Gulf Pipeline Capacity « Streetwise Professor | Fifth Estate — February 19, 2013 @ 9:09 am

  2. Well, Craig, word certainly travels fast! I was careful to mention that the figures were a year old, but I had sort of assumed the value would actually be less, because the number of barrels proposed among various projects had risen significantly from last year. I think I even mentioned that a revised number might be lower. So I was surprised to see here a significantly higher estimate.

    I recall very much your comment about the dueling benchmarks, and their respective troubles. You inquired, in a rhetorical manner: what is it easier to add…North Sea capacity or North American infrastructure?

    Comment by John Kingston — February 20, 2013 @ 11:33 am

  3. [...] before you click this link and see what the number is up to, take a guess regarding how high it might be, and see how far off [...]

    Pingback by A new calculation on the value of all those projects to debottleneck oil at Cushing « The Barrel Blog — February 20, 2013 @ 12:38 pm

  4. @Thanks John. Like I said, I have a vast network of informants! The number is bigger because the quantity is bigger, but the nearby spread is as wide or wider than it was last year.

    Thanks for remembering my comment. Still true. Adding NA infrastructure more challenging than I thought, but it’s still easier than adding North Sea capacity.

    Hope all’s well.

    The ProfessorComment by The Professor — February 20, 2013 @ 12:38 pm

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