Seaway Pipeline: What it Means for WTI Crude

by David Fessler, Investment U Senior Analyst
Friday, November 18, 2011

A few weeks ago, I wrote an article here titled Why You Should Completely Ignore West Texas Intermediate Crude Oil Prices.

I pointed out that Cushing had an oversupply situation. It was receiving more oil than it could store, and was frantically building more storage capacity to hold all the additional oil it was getting.

But the real reason for the price differential between West Texas Intermediate (WTI), the American crude benchmark, and Brent crude, the benchmark for the rest of the world, was the inability to get oil out of Cushing.

There are plenty of pipelines bringing oil into Cushing, but few that take it in the other direction. That pipeline limitation has resulted in WTI pricing well below that of Brent. The difference was as much as 30 percent below just a few weeks ago.

What a difference a few weeks makes. WTI has now surged well above $100 a barrel, and has quickly closed the gap between it and Brent.

What’s Changed?

On Wednesday, ConocoPhillips (NYSE: COP) announced it would be selling $2-billion worth of pipeline assets. The first one is its 16.55-percent interest in the Colonial Pipeline Company and Colonial Ventures, LLC to Canadian-based Caisse de depot et placement du Quebec (CDPQ). That transaction is should be completed in the first quarter of 2012.

But the second transaction has the energy markets buzzing. Conoco entered into an agreement with Enbridge Holdings, LLC, a subsidiary of Canadian company Enbridge, Inc. (NYSE: ENB), to sell its ownership in the Seaway Crude Pipeline Company (SCPC).

Both sales are part of a $15- to $20-billion divestiture of non-core pipeline assets that Conoco wants to complete by the end of next year. Eight billion in deals were already completed earlier this year and last. The inclusion of the two deals mentioned above puts the company $2 billion closer to its target.

Pipeline U-Turn

But it’s what Enbridge is going to do with the Seaway Pipeline that has sent WTI prices skyrocketing. It’s simply going to reverse the flow. It turns out that’s a huge game-changer for American oil producers.

When the pipeline reverses, much more WTI crude will be available to Gulf Coast refineries. Enbridge’s initial estimates are that the pipeline will be sending 150,000 barrels per day of crude to Gulf refineries by the second quarter of next year.

Cushing surpluses could become a thing of the past. That’s hugely bullish for WTI crude, as it now can be sold to many more refineries than before. The end result is you’ll likely see the gap between WTI and Brent continue to shrink.

In a news release announcing the reversal, Patrick Daniel, President and CEO of Enbridge, Inc., had this to say:

“The Seaway Pipeline reversal provides an early opportunity to offer Gulf Coast access to midcontinent producers and other crude oil shippers.

“A Seaway reversal will provide capacity to move secure, reliable supply to Texas Gulf Coast refineries, offsetting supplies of imported crude.”

With the modification of existing pumping stations and the addition of a few more, Seaway’s capacity could be raised to over 400,000 barrels per day by early 2013.

All this news comes just a few weeks on the heels of the State Department’s decision to review the application for TransCanada’s controversial Keystone Pipeline. The Keystone would provide Gulf refinery access to Canadian oil sands crude.

Right now, the state of Nebraska and several environmental groups are opposed to the pipeline, saying it will cross environmentally sensitive areas, including the Ogallala Aquifer, a major source of water for Midwestern States.

Regardless of the eventual outcome of the Keystone Pipeline, the Seaway reversal is a key source of supply for U.S. refineries, and increases our ability to purchase less foreign oil.

And that’s a good thing in and of itself. Investors might want to consider shares of Enbridge, since its bottom line should improve along with increasing flows from the Seaway.

Good investing,

David Fessler