Producers Work to Relieve Cushing Oil Glut

For state oil producers, it might be a classic case of being careful what you wish for as they debate the effects of Canadian oil being piped into the oil depot at Cushing.
The issue of crude oil supply stored at Cushing, the storage/delivery hub for the oil traded on the New York Mercantile Exchange, has been debated for several years. Pipeline companies, who piped oil from Cushing to Chicago and Eastern U.S. markets, reversed their flow and began bringing oil to Cushing from western Canada for storage.
“Dumping” might be more like it, listening to Oklahoma producers talk about it.
They have a point.
Producers blame lower crude oil sales prices on the influx of hundreds of thousands of barrels per day of oil flowing from Canada.
Two pipelines play a part in the current glut at Cushing. The Spearhead pipeline, which once took 125,000 barrels a day out of Cushing, now brings the same amount of oil into the hub — a 250,000 barrel-a-day swing. Also, TransCanada Corp. will bring Canadian crude to Oklahoma. The Calgary-based company will transport 590,000 barrels per day to Cushing by late 2010, up from its previously announced capacity of 430,000 barrels per day.
BP Inc. had announced plans to bring 100,000 barrels per day from Chicago to Cushing later this year.
Oklahoma producers are seeing the Canadian crude displacing Oklahoma Sweet — driving down the price of the state’s benchmark grade of oil. Producers saw the same thing happen in Wyoming and Montana, where oil piped from north of the border caused prices to crater.
The issue is capacity at Cushing. If there is a sufficient amount of oil sent to other markets there is not an issue. But, if there are tens of thousands of barrels coming in and nothing going out of the depot west of Tulsa, there is a backlog. Then over capacity creates a glut and prices drop. State producers are trapped — they have to sell at Cushing. When the oil can’t get out, they are the ones directly affected. Everything fed into the Cushing market is at a disadvantage. And it is not just Oklahoma — producers in Kansas, Illinois, Texas and other states are taking the hit — although Oklahoma producers take the brunt of it. The effect of incoming Canadian crude could be minimized if projects are completed to transport the oil to refineries on the Texas and Louisiana Gulf Coast. Houston-based TEPPCO has proposed a 370,000-barrel-per-day line in the area by the third quarter of 2010.
The result? Oklahoma independent oilmen and women, who produce 96 percent of the crude oil in the state, watch the price of domestic oil sold at Cushing — where nearly 10 percent of the nation’s oil is stored — being driven down below market prices.
It is an alarming situation. Since Oklahoma taxes the sale of oil, as prices for Oklahoma crude plunge, wells would be shut in and tax revenues for state programs fall. Then we watch lawmakers scramble for budget dollars during the legislative session.
So, Oklahoma oil producers, who normally eschew government interference, look for protection from state and local regulators. Attorney General Drew Edmondson earlier this year started looking into concerns that the oil dump was a violation of state and federal antitrust laws. Producers are addressing the Corporation Commission and working with the Federal Energy Regulatory Commission and the U.S. State Department to prevent too much oil from flooding Cushing and other markets too quickly.
Last week the Corporation Commission discussed whether the supply of crude oil in Cushing exceeds available storage and pipeline capacity and whether any excess supply constitutes a waste of crude oil resources.
For years the oil industry has touted the oil sands in Canada as being a source of relief from the pressure to import MidEast oil. Today, Canadian oil sands production is expected to surge. As we’ve seen over the past three years, the sudden influx overwhelms facilities causing prices to fall which hurts producers.
Producers got their wish for Canadian oil, they just did not count on it coming in one day.

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