For the first time ever, a Very Large Crude Carrier (VLCC) carrying Bakken crude has sailed from the Gulf of Mexico to Asia, and more may follow. With the startup of the Dakota Access Pipeline set for June 1, Bakken producers are only days away from gaining easier, cheaper pipeline access to the Gulf Coast, and are looking for new markets. Asian refineries are willing to pay a premium for Bakken-type crudes, and want other types of U.S. crude as well. And every 18 hours or so, a VLCC arrives at the Louisiana Offshore Oil Port—the only U.S. port capable of handling the mammoth vessels—offloads crude and leaves LOOP empty because the port is currently an import-only facility. Today we consider the potential for transporting more light, sweet crude to Asian refineries on VLCCs, either via ship-to-ship transfers or by reworking LOOP to enable exports.

This past Sunday (May 14, 2017), the Greek-flagged Maran Canopus, an 1,100-foot-long VLCC capable of carrying more than 2 million barrels (MMbbl) of crude, completed a weeks-long journey from off the coast of Louisiana to Malaysia. According to our friends at ClipperData, before the Maran Canopus left the Gulf of Mexico, she received ~600 Mbbl of Bakken crude as well as ~1 MMbbl of Mars Sour crude (and other crude as well). A smaller Aframax-class vessel, the ADS Oslo, loaded the Bakken oil at Enterprise Products Partners’ Beaumont, TX, marine terminal and transferred her cargo to the VLCC in deeper waters. The Mars Sour crude (which was produced from deepwater wells in the Gulf) was loaded onto two ships—the very same ADS Oslo at Royal Dutch Shell’s Sugarland marine terminal in St. James, LA, and another Aframax-class ship, the Eagle Texas, at NuStar Energy’s nearby St. James marine terminal —which transferred their cargoes to the Maran Canopus too. (Mercuria Energy Trading is listed as the shipper on the export bill.) We understand from ClipperData that this is only the second time that Bakken crude has been exported out of the Gulf of Mexico ­­—the first was a much smaller volume (~174 Mbbl) that was shipped out of the Gulf to Rotterdam (in the Netherlands) in April 2016. 

We’ve blogged extensively about the subjects that swirl around the topic we’re zeroing in on today. Back in 2014 (see Imagine There’s No Export Ban), we previewed the likely effects of the lifting of the 40-year ban on most crude oil exports to countries other than Canada, which occurred in December 2015. In Thrown for a LOOP, we described the Louisiana Offshore Oil Port, which is the only port in the U.S. capable of offloading VLCCs and even larger Ultra Large Crude Carriers (ULCCs) (as well as smaller tankers). LOOP consists of three single-point mooring buoys 18 miles off the Louisiana coast in waters 110 feet deep. The offloading points (photo below shows a ship offloading) are connected by a 48-inch-diameter, northbound-only pipeline to the Clovelly Hub, a crude storage and blending facility located 25 miles inland in Clovelly, LA; the hub has eight underground salt caverns with a combined capacity of more than 60 MMbbl, as well as more than 20 aboveground tanks totaling another 12 MMbbl. The Clovelly Hub is also the pipeline destination for as much as 500 Mb/d of offshore Gulf of Mexico crude production, primarily from the Shell-operated Mars pipeline system and BP’s Thunder Horse field. And since 2013 Clovelly has also been a destination point for Shell’s Zydeco Pipeline (formerly Ho-Ho), which delivers up to 350 Mb/d of crude from terminals in Houston; Port Arthur/Beaumont, TX; and Lake Charles, LA. From the storage hub, crude can be delivered by pipeline to Gulf Coast and other refineries that together account for more than half of total U.S. refining capacity.

In The Great Beyond, we looked at the increasing use of LOOP as a receiving point not only for imported oil (on VLCCs and ULCCs) but for crude and condensate shipped on smaller, Jones Act vessels from Corpus Christi, TX, and other Gulf Coast ports as a more efficient way to get oil to refineries east of Houston. In that blog we also discussed the potential for LOOP —in the post-crude-ban era —to be converted to an export facility or, more likely, for LOOP to be expanded to allow both exports and continued imports. Then, in Already Gone, we discussed how Bakken producers were losing their East Coast refineries market to imports, and in What a Difference a DAPL Makes, we discussed how the new, 525-Mb/d, Dakota Access Pipeline (DAPL, which is scheduled to begin operating June 1) to the Patoka, IL, crude hub and the connecting Energy Transfer Crude Oil Pipeline (ETCOP) from Patoka to Nederland, TX, will simplify and reduce the cost of moving Bakken barrels to the Gulf Coast. Lastly, in Return to Sender, ClipperData’s Abudi Zein blogged about the economics behind loading light, sweet U.S. crude onto VLCCs after the vessels have offloaded their imported oil at LOOP. He noted that because LOOP can’t load ships, the VLCCs leaving the offshore port are generally on offer at reduced rates because the alternative for the ship owner is to sail back empty to the Middle East. Getting a backhaul cargo is worth some discounting.

That’s what appears to have happened with the Maran Canopus, whose Gulf-to-Malaysia trek with Bakken and other crude onboard we discussed above. As we said, the VLCC was not loaded at a port; instead it was filled through a series of ship-to-ship transfers in which smaller ships (the ADS Oslo and the Eagle Texas among them) received their cargos at land-based marine terminals in Beaumont and St. James, sailed out to the deep waters where the VLCC was waiting, and offloaded their Bakken, Mars Sour and other crude onto the Maran Canopus. This type of loading isn’t particularly efficient; it’s sort of like making several trips with a hand truck to roll the half-dozen kitchen cabinets you just bought at Home Depot out to your pickup truck in the parking lot versus driving your truck up to the contractors’ door. But (for now, at least) ship-to-ship is the only way to use VLCCs or ULCCs —the most cost-effective way to transport crude long-distance —to move crude from the Gulf Coast to Asia or other far-away markets.

The number of ship-to-ship transfers of Mars Sour, West Texas Intermediate (WTI) and other (non-Bakken) crudes onto VLCCs leaving LOOP has been increasing since the crude export ban was lifted nearly a year-and-a-half ago. Most of that activity is taking place off the Texas coast near Galveston and off the Louisiana coast near the mouth of the Mississippi River. As more Bakken crude is able to flow down to the Gulf Coast through DAPL and ETCOP, we may well see more ship-to-ship transfers of Bakken crude onto VLCC shipments as well.

A more efficient alternative that we first discussed in The Great Beyond would be to enable direct loading of VLCCs and ULCCs at LOOP —if that import facility were reconfigured or expanded to provide that capability, that is. Because of the Shale Revolution, import volumes into LOOP have declined considerably over the past few years: from 785 Mb/d, on average, in 2012 to 524 Mb/d in 2016 and 502 Mb/d in the first four months of 2017, according to ClipperData. But since 2013, those import volumes into LOOP have been supplemented by the receipt of Eagle Ford crude (mostly out of Corpus Christi), especially in 2014-15 when Eagle Ford production was still riding high. In both 2014 and 2015, an average of 106 Mb/d of Eagle Ford crude was received at LOOP; in 2016, those volumes fell to 48 Mb/d, and in the first four months of 2017 they’ve averaged only 36 Mb/d.

LOOP remains important as an import facility —Gulf Coast refineries depend in part on crude types that come in through the offshore port from foreign sources. Still, enabling crude exports through LOOP (as well as the ability to load Jones Act ships at LOOP that could deliver Bakken and other crude to East Coast refineries) would provide added flexibility, and LOOP’s co-owners —Marathon Pipe Line, Shell Oil and Valero Terminalling & Distribution —surely are keeping a close eye on U.S. crude production and export trends. The bottom line is that LOOP and its Clovelly Hub could become a Gulf Coast crude blending and trading center. The 2013 reversal of the old Ho-Ho Pipeline (now Zydeco) has facilitated inbound flows to Clovelly of shale crude from Texas as well as Bakken and Canadian crude delivered to Nederland/Port Arthur from the Cushing Hub in Oklahoma; DAPL and ETCOP will only increase the availability of Bakken crude along the Gulf Coast. All that crude will need to find a market, either domestic or overseas, and being able to export oil on huge supertankers would make U.S. crude more competitive from a delivered-price perspective.