Russian exports to California fell to record levels.
California has been shipping in more crude via railway from the Bakken, which drove down the need for Russian imports of light crude to 713,000 barrels from 6.53 million, the high in June of last year. And California is on its way to phasing out Russian imports entirely by the end of 2014.
The reduction of overseas imports on the West Coast is the latest example of North America’s success in drilling for more crude. Saudi Arabia, a large exporter to the West Coast, also saw the region’s imports drop to 207,000 bpd in March of 2013, the lowest number since 2010, Bloomberg reports.
Refineries in California are blending light, sweet crude from the Bakken with heavier crude as a way of mimicking the variety found in Alaska’s sputtering North Slope region. It is also a way for refineries retrofitted for thick crudes to forestall investment in expensive upgrades to accommodate light domestic crude.
The reduction in imports comes as a double whammy to Russia’s energy export economy, since its oil and gas industry has taken a slight hit due to Western Europe’s increased imports of cheap coal from the U.S. to contend with economic struggles. Now Russia’s East Siberian Pacific Ocean (ESPO) light crude pipeline is directly competing with West Texas Intermediate crude.
The ESPO crude benchmark began in 2009 with the construction of rail and pipeline networks that connected Siberian fields to the Kozmino oil terminal.
Like OPEC, Russia has been somewhat affected by the American crude bonanza, but there are still many other market avenues for ESPO crude. Rosneft OAO (MM: ROSN) is in the midst of negotiations with China to increase imports. ESPO pipeline operator Transneft (OTC: TRNFF) plans to increase crude exports from 30 million tons to 36 million tons in 2013.
And Europe may have reduced its oil imports, but the western half of the European continent is still heavily reliant on crude shipments from Russia’s Urals region.
The Russians may have lost slightly on the American West Coast, but additional infrastructure for East Siberian crude gives Russia direct access to Asian markets, where economies there crave more petroleum imports.
China is a large consumer of Russian oil, and Japan is importing a greater amount from the Russians after shutting down most of its nuclear reactors in response to the Fukushima disaster in 2011.
WTI crude has higher value than Brent crude, but Russia’s light crude was specifically blended with less crude salt to increase its value. Rosneft and Transneft are just a few companies that peg ESPO crude as a benchmark alternative to Brent as reserves from the North Sea continue to dwindle. Other benchmark agencies would also prefer ESPO.
The Russians touted ESPO as a higher value than Saudi Arabia’s blended crude in terms of sulfur levels, but Russia also plans to compete with WTI crude. ESPO has an API gravity of 34.8 and a sulfur level of .62%. But WTI is still of higher quality, with an API gravity of 39.6 and .24% sulfur.
There are skeptics who believe America’s production boom will inevitably lead to a bubble, but it is not an impossible scenario for WTI crude and ESPO to one day compete directly on the world market. But that would only happen if the U.S. had a more sophisticated network of pipelines and enough market and political breathing room to export WTI crude abroad.
And with pipeline projects like Keystone XL being held in limbo, it will be a very long time before WTI could have more impact in the international energy market.
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Keystone XL & Railway
As President Obama continues decide on Keystone XL’s fate, the rail industry is getting quite a boost in revenue from energy companies that need to ship crude where necessary.
And it’s not just about Keystone XL; the U.S. as a whole does not have enough pipelines for crude shipments to flow smoothly to Gulf Coast refineries and the New York Mercantile Exchange. The spread between Brent and WTI has already narrowed because of new infrastructure to relieve Cushing gluts but not enough to directly compete with Brent prices.
And there is a growing shift in the way crude is being transported.
More companies and investors are looking to railroad crude transportation, including Warren Buffett and his company’s purchase of railroad company Burlington Northern Sante Fe, which ships crude from the Bakken.
Kinder Morgan Energy (NYSE: KMP) recently canceled plans to build a pipeline that would extend from the Permian Basin of Texas to California. Oil transports by pipelines cost around $9 per barrel, while shipping via rail hovers around $14 per barrel, but many refiners would prefer not to be tied down by pipeline contracts.
Trains are becoming a safer investment as more energy insiders are frustrated by delays in Keystone XL and the tougher regulations involved in constructing newer pipelines. And in places where production sites and market/refining destinations are in close regional proximity, it makes good business sense to use trains over pipes.
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