In an effort to catch the waves of U.S. oil production, representatives for Phillips 66 (NYSE:PSX) have reached multiple deals that will increase domestic crude to their refineries, with a figure of 130,000 barrels a day, as reported by Businessweek.
On average, domestic crude is $15 cheaper than the international variety. The growing need for lower gas prices and fewer foreign imports has lead to increased domestic crude reserves being exploited in many areas of the country. Drilling methods such as hydraulic fracturing (fracking) and horizontal drilling have also led to higher domestic output.
The U.S. is on high ground in the realm of crude production, which has contributed to lower American demand for OPEC imports.
Because of these multi-faceted deals, Phillips will offset the cost of imported crude with shipments from the Mississippi Lime in the Anadarko Basin and the Bakken shale region, according to a separate Businessweek article.
One of the deals includes Magellan Mindstream Partners (NYSE:MMP). Magellan transports will be shipped to a Phillips refinery in Ponca City, Oklahoma. This will allow Phillips to replace West Texas Intermediate crude from Cushing, Oklahoma with crude from the Mississippi Lime.
A flow of 20,000 bpd is expected to begin later in the year and stretching into January, according to Fuel Fix.
Phillips also plans to make further investments in transportation, which could spawn an additional 40,000 bpd of Mississippi Lime crude in Ponca City.
Phillips signed onto a three-year agreement with a subsidiary of Enbridge Energy Partners (NYSE: EEP) known as Enbridge Rail as well. Enbridge will ship rail car loads of Bakken crude to Phillips in the range of 35,000 to 40,000 bpd by November, Fuel Fix reports. These shipments will be spread out among Phillips’s East and West Coast refineries, with a possible agreement on shipping to the Gulf Coast as well.
The company also made a five-year deal with Targa Resources Partners (NYSE: NGLS). On Targa’s end, the company will use its terminals in Tacoma, Washington to unload railcars of American and Canadian crude—shipping them by barge to a Phillips refinery in Ferndale, Washington.
The agreement could yield a potential of 30,000 bpd in domestic oil production. Phillips’ San Francisco refinery could also benefit from the Targa deal—replacing international reserves with domestic shipments.
Such deals are an indicator that Phillips is doubling down on domestic crude with full confidence. And the political climate could swing in Phillips’ favor.
“It solidifies the idea that if you’re a refinery bringing in imported oil, you want to find a way to bring in shale oil from the U.S.,” said Carl Larry, a commodities broker with Houston-based Atlas Commodities LLC. “It just goes to show this fracking drilling, and the supplies coming from it, is increasing all the time.”
Phillips owes much of its new dealings to new technologies and drilling practices, particularly fracking.
So far, the EPA has not imposed harsh regulatory measures on drilling practices, mainly because fracking is contributing to spikes in crude oil discoveries.
An article by Bilings Gazette discussed the EPA’s concession to Montana in allowing the state to regulate fracking. This could be the future model in which all states deal with drilling measures. The Bakken Shale region includes the state of Montana, and the EPA ruling could have a positive impact on the Phillips agreements and future shipments.
There is also good news for Phillips’ East Coast refineries; The Boston Globe reports the shale oil boom is keeping the refinery industry in that region alive.
Phillips should also pay attention to New York’s extended ban on fracking until 2015. While the ban is in place, the measure has a strong chance of being repealed in the future—with something that would allow more extensive drilling into the Marcellus region.
With no major fracking sanctions looming forth, this is great news for investors, oil exploration companies, and refineries.
Regardless of lacking infrastructure or government regulation, many companies like Phillips are seizing the moment. According to Businessweek, Tesoro Crop (NYSE: TSO) and Valero Energy Corp. (NYSE: VLO) are among other refiners that are shifting towards the domestic crude market. The Phillips deals are just part of a larger trend that could change the face of crude transport and imports.
The deals also highlight the need for a more extensive pipeline network. Businessweek used the example of shipping crude from North Dakota to a refining center in Houston by rail at a cost of $14 bpd as opposed to $9 bpd through pipeline.
As of yet, oil infrastructure is not keeping up with growing production. According to the U.S. Energy Information Administration (EIA), there will be an increase of oil production in 2014—from 7.3 million bpd in 2013 to 7.9 bpd in 2014.
Pipeline growth is imminent as the U.S. further taps into its crude resources, but it will take time and investment.
Various railway projects have been agreed upon in the deals, according to Businessweek, but pipelines would have secured a cheaper route of transport. However, this is only the beginning, and perhaps more companies will focus on pipeline construction as domestic output progresses.
There is no guarantee that imports will continue to decline, and the U.S. will continue to rely on Saudi imports, but the Phillips deal is a sign that success from higher crude production is spreading to other areas of the oil industry.
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