The boom in U.S. oil and gas production is transforming the infrastructure needed to deliver carbon-based fuels throughout the U.S. and especially in the Gulf ports that have traditionally served as gateways for crude oil imports.
As new sources of domestic crude oil and natural gas come on line, U.S. demand for imported fuels is waning and new markets for U.S. refined products and coal exports are opening overseas. That’s changing everything around at many Gulf ports.
Wall Street analysts estimate energy and transportation companies plan to spend more than $223 billion on new pipelines, storage tanks and petroleum and petrochemical refineries in the U.S. — and that may only be the beginning of the investment flow. After decades in which most investment of this type was funneled to areas close to low-cost oilfields in the Middle East and Persian Gulf, the switch back to the U.S. is being fueled by the low cost of natural gas produced by the hydraulic fracturing process in the Eagle Ford Shale Formation in South Texas and the Bakken Shale Formation in western North Dakota, eastern Montana and Saskatchewan.
“The U.S. and to a large extent Mexico use natural gas as a feedstock and a fuel in making plastics and steel, whereas Europe and Asia use oil and coal,” said Walter Kemmsies, chief economist for port design consultant Moffatt & Nichol. “Given that gas prices in the U.S. have fallen, this is giving the U.S. a significant competitive advantage.”
A Price Advantage for the U.S.
The world is paying $90 to $100 for a barrel of oil, which is a globally traded product, but natural gas isn’t globally traded, so the U.S. is paying a lot less for that. Gas costs about $3.50 to $4 per million British thermal units in the U.S., while Europe pays $8 to $10 per million BTUs, and Asia pays $12 to $16. This price disparity is the reason companies are investing billions of dollars in new U.S. refineries and petrochemical plants, especially in and around the Gulf ports. “The Gulf Coast is well-positioned to feed gas to Europe, and, with the expanded Panama Canal, to Asia as well,” Kemmsies said.
In addition, the existing pipeline network is geared toward refineries and chemical plants in the Gulf. But the pipeline network isn’t connected to the Bakken field yet, so BNSF Railway and Canadian Pacific Railroad are investing in their connections to it, even though the cost of transporting oil by rail is some five times as expensive as by pipeline.
“It’s hard not to overstate it. It’s going to dramatically change the energy supply system in the U.S.,” said John LaRue, executive director of Port of Corpus Christi, which is attracting billions of dollars in new investment. “We have more going on right now than in the 18 years I’ve been here. A lot of it is the shale development and the plentiful supply of gas that makes U.S. chemical companies competitive.”
Corpus Christi also is handling increasing outbound shipments of crude oil, generally not to foreign ports, because federal law prohibits crude oil exports without a license, but to other U.S. coastal refineries. Crowley, for example, operates a regular Jones Act shuttle service carrying crude oil from Corpus Christi to U.S. East Coast ports in new coastal tankers built in Philadelphia’s Aker Shipyard. In addition, Valero Energy and BP have secured permits to export Eagle Ford crude oil from Corpus Christi to refineries in Quebec.
Corpus Christi’s Investment Menu
LaRue reels off a galaxy of new investments in plants that are taking advantage of the Eagle Ford development:
— Chenier Energy expects to get permits by year-end to build a $10 billion LNG plant for the export market that will start construction next year and be completed by 2017.
— LyondellBasell, a large French plastics, chemical and refining company, is investing $400 million to build a petrochemical plant at the port that will produce polyethylene terephthalate and PET plastics from Eagle Ford gas for the U.S. and export markets.
— Italian resin manufacturer M&G Group plans to build a $1 billion plant at the port by 2016 to manufacture PET for shipment to U.S. and overseas plants that use it to make plastic bottles. M&G chose Corpus Christi because of rail access, which it will use to bring 40 carloads in and out of the plant every day. With the help of a $10 million federal TIGER grant, the port, the state and railroads are investing $46 million in a new railyard to serve the M&G plant.
— Austrian steelmaker Voestalpine is investing $700 million in the first phase of a plant at the port’s La Quinta Ship Channel to produce direct-reduced iron using Eagle Ford gas. U.S. and European automakers use the iron briquettes. Voestalpine will import 2.8 million tons of iron ore annually for reduction and ship 1 million tons for the U.S. market and 1 million for export.
— Valero Energy’s Three Rivers refinery, which used to refine crude oil imports that flowed by pipeline from storage tanks in Corpus Christi for the domestic market, has reversed the pipeline flow to funnel product made from Eagle Ford crude to those storage tanks for distribution via barge to other U.S. ports for refining. LaRue expects most of the refineries around Corpus Christi to switch over to refining Eagle Ford crude oil from imports in the next five years.
— Tianjin Pipeline, the biggest Chinese investment in the U.S., has started construction on the first phase of a $1.3 billion plant to build steel pipes for oil and gas pipelines. The plant was planned before cheap natural gas from Eagle Ford entered the picture, so it will benefit from cheap gas to fuel its pipeline production and from the growing demand for pipelines to carry the oil and gas in the U.S. The first phase is a pipe-threading facility, which will be completed by year-end and represents only 10 to 15 percent of the eventual plant.
Corpus Christi isn’t the only Gulf port to see a surge of energy investments. Houston, 200 miles or so up the coast, also is experiencing a huge energy boom. “Our energy and manufacturing sectors are growing like gangbusters,” said Charlie Jenkins, vice president of strategic planning at the Port of Houston Authority.” Private manufacturers are investing some $35 billion in new facilities in the Houston area. “Our chemical and petrochemical exports are booming and predicted to continue to increase as more capacity comes on line.”
All of the refineries in the Houston area plan to export more refined and petrochemical products, so Battleground Oil Specialty Terminal and Intercontinental Terminals are building new liquid bulk facilities.
In a survey by the Greater Houston Port Bureau of the 132 energy companies located along the Houston Ship Channel, the 52 companies that responded said they plan to invest $28.8 billion over the next few years in their production facilities, for the domestic and export markets.
“What’s happening is that ethane from natural gas is much cheaper to use than oil as a feedstock for plastics,” Houston Port Bureau President Bill Diehl said. “Not only that, but it’s much cheaper to use methane from natural gas as fuel to crack the chemicals, so what used to cost me $2 now costs me 50 cents.”
Energy companies also are developing export markets for byproducts of fracking, such as propane. “We’re shipping out propane like crazy, because we just don’t use it here in the volume they use overseas,” Diehl said.
Unlike LNG, propane can be shipped in thin-walled tanks on chemical carriers rather than the expensive thick-walled carriers required to keep the gas in liquid form. Propane also is much cheaper to ship. “That commodity is perfect for South America and other developing markets that heat their houses with propane,” Diehl said.
As domestically produced oil and gas from the new oil and gas fields replaces imports of crude and refined petroleum for the U.S., the U.S. is becoming a net exporter of refined products. Canada and Mexico used to take up most U.S. exports of refined products, but export markets have expanded to include the Caribbean, Central and South America. Exports of refined products are running at 3 million barrels a day, with more than 60 percent destined for countries located in the Western Hemisphere, according to Dave Cooley, author of an article in the Houston Port Bureau’s February newsletter.
Gulf ports are the primary beneficiaries of these new market trends because they are the closest ports to these new markets, which generally lack their own refineries. “As a result, the export of refined petroleum products from Gulf Coast refineries has steadily grown from about 45 percent of U.S. export of refined petroleum products to 75 percent today,” Cooley said. Exports of refined petroleum products have grown from about 1 million barrels a day in 2005 to 3 million now.
Filling a Coal Gap at Mobile
The low cost of natural gas has made it a low-polluting substitute for coal, which was formerly an important segment of the import business at the Port of Mobile. Coal imports have fallen off at the Alabama port as U.S. electric power utilities cut back on coal purchases.
“Utility coal imports are dead-on flat and could go away completely by 2015, because of regulation and natural gas,” said Jimmy Lyons, executive director and CEO of the Alabama State Port Authority.
But Mobile’s utility coal exports are growing because of demand by European power companies. “They need the cheap energy, and our coal is a competitively priced source of energy,” Lyons said.
As a result, the port started building a new ship-loader for coal in December, which will give it another 5 million to 6 million tons of export capacity. The port authority also is considering investing another $70 million to retrofit its import coal terminals for the export trade. It may build a third export berth in addition to the two it will have in operation by the middle of 2013.
This may only be the beginning for coal and LNG exports via Gulf ports, because when the Panama Canal completes its expansion in mid-2015, the new locks will be able to handle much larger ships that can carry those U.S. carbon fuel exports to Asia.
Panama Canal Administrator Jorge Quijano said ships that can transport LNG and coal weren’t considered candidates for using the canal when the expansion was planned in 2004, but as the U.S. becomes a big producer of natural gas from shale, they could grow into what Quijano calls an interesting segment for transporting product to Asia.
Unlike containers, LNG and coal is transported under long-term contracts of 10 to 15 years. “While all our other segments are very volatile, once you have a contract for 10 to 15 years for one particular route and that route includes the Panama Canal, then that would guarantee in essence that they would be here for the next 10 to 15 years,” Quijano said.