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.
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.