Unconventional Oil Supply Overwhelms Pipeline--Forces FERC Ruling

If any oil markets analysts are wondering whether the massive crude buildup at the Cushing, Okla., storage terminal has been eased by the startup last year of the new Seaway Pipeline (Seaway Crude Oil Pipeline Company LLC), a recent Federal Energy Regulatory Commission (FERC) proceeding provided a clear answer: "Not so much."

In an April 12 order, FERC approved a plan by Seaway to set up a lottery system to deal with the hordes of squabbling shippers fighting over the limited uncommitted capacity still available on the line, which was opened by Enbridge Inc. and Enterprise Product Partners LP in May 2012 to provide additional takeaway capacity to the Gulf Coast for the vast amount of tight oil pouring into Cushing.

While Seaway would typically pro-ration uncommitted space on the line, the pipeline operator said a lottery was the only way to handle the oversupply of oil at Cushing, which by March 2013 had grown so large that 200 new shippers nominated over 1.5 billion barrels to be moved on the remaining uncommitted capacity on Seaway, representing 21 times the available capacity that month.

Over the complaints of some shippers, FERC ruled that the lottery system was a "just and reasonable" method to distribute the uncommitted capacity on Seaway. The commission added that it saw no evidence of discrimination or favoritism for Enbridge and Enterprise affiliates in the lottery system.

While seeking approval of the lottery, Enbridge and Enterprise not surprisingly are scrambling to expand the Seaway system. The companies are installing additional pumping stations along the pipeline's route, as well as constructing a 30-inch "loop" pipeline that will follow the same 512-mile route from Cushing to Freeport, Texas. When complete, the upgrades are expected to boost the project's capacity from 150,000 barrels of oil per day (bpd) today to 850,000 bpd by January 2014.

The demand for pipeline capacity from Cushing to Texas is good news for TransCanada Corp.'s Gulf Coast Pipeline Project, which was once the southern leg of its Keystone XL pipeline. Work on the Gulf Coast pipeline, which also runs from Cushing to the Gulf Coast, was begun in August 2012 to provide up to 830,000 bpd of takeaway capacity. The project is currently 70 percent complete, according to the company, and is expected to enter service by the end of 2013.

TransCanada detached the Gulf Coast pipeline from its Keystone XL project when the northern section of Keystone XL-which runs from Alberta to Cushing--ran into permitting delays at the State Department.

Seaway's lottery request at FERC revealed that there was plenty of remaining demand for the Gulf Coast pipeline given the ongoing overflow at Cushing, which is the result of surging crude production in the Bakken play and the Alberta oil sands.

The glut at Cushing has had major market impacts, depressing the price of West Texas Intermediate in relation to international oil benchmarks due to the inability of landlocked oil at Cushing to flow to market.

Seaway is seeing demand overload at Cushing because it allocates 90 percent of its capacity to long-term "committed shippers" and "regular shippers" who have established a history of moving at least 60,000 barrels per month on the system in the preceding 12 months. Only the remaining 10 percent is available to "new shippers" who do not have a history of using the system.

Seaway told FERC it planned to pro-ration the uncommitted capacity to new shippers, but that it faced huge demand from the beginning. It said that when the pipeline opened in May 2012, five new shippers sought to ship 4.4 million barrels on the system that month--more than four times the available capacity.

Because Seaway pro-rations the remaining capacity on the pipeline according to the size of each company's nomination, Seaway said that under the existing pro-rationing system it was unlikely that any new shipper would be able to gain regular shipper status.

To solve the problem, Seaway proposed to FERC that the company change its tariff to create a lottery system that will randomly award the extra capacity to 13 new shippers in increments of 60,000 barrels per month to ensure that each of the shippers will receive that minimum capacity-though they would still be required to ship 60,000 barrels per month for 12 consecutive months to qualify as a regular shipper.

The proposal generated opposition from three Seaway shippers: Suncor Energy USA Marketing Inc., Apache Corp. and Noble Energy Inc.

Suncor said it has successfully shipped the minimum 60,000 barrels per month during the pipeline's first 10 months of operation, and the company expects to do so again in April. But, Suncor said, if the new lottery system was put in place in May, the company was unlikely to win the capacity and would thus lose its chance of becoming a regular shipper. With 200 names in the lottery, any particular company has a 6.5 percent chance of winning one of the 13 slots.

Apache and Noble filed a joint protest to the proposal, saying that Seaway's lottery proposal "serves to insulate and benefit its current regular shippers," according to the April 12 FERC order.

In response to the complaints, Seaway said the objecting companies had "every opportunity" to become committed shippers during the two open seasons Enbridge and Enterprise held for the pipeline. Seaway also said the point of the lottery is not to make it easier to become a regular shipper, but rather to prevent new shippers from having ever-decreasing monthly capacity allotments because the available capacity stays fixed while the number of new shippers grows.

FERC rejected the shipper complaints about the lottery system as unwarranted, saying: "The commission finds that on balance the proposed revisions represent a just and reasonable solution to the difficult apportionment problems that have affected Seaway since it began moving crude oil north to south in May 2012."

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.