By Devika Krishna Kumar and Collin Eaton (NYSE:ETN)
NEW YORK/HOUSTON (Reuters) – Decades ago, a distiller in Scotland discovered the marketing power of “single malt” whisky, untouched by blending – a technique now being embraced by sellers of Texas crude oil.
The United States is selling more oil overseas than ever, and refiners in Europe and Asia are scrutinizing the quality of that oil after some shipments of U.S. crude contained impurities or contaminants that made it difficult for overseas refiners to process. Two U.S. shipments were even refused by South Korea last year.
Overseas buyers are demanding barrels that travel directly from wells to export terminals with little blending, to minimize problems introduced when crude passes multiple transport systems.
Like that single malt Scotch, the biggest sellers of U.S. crude are touting so-called “neat” barrels, delivered direct from the shale patch to the Gulf, as a way of boosting the allure of the country’s flagship Midland, Texas crude.
“What we’re hearing from our customers around the world is they want pure Midland WTI blend,” said Ben Luckock, co-head of oil trading at Trafigura.
The United States has become a top exporter of crude after ending a 40-year ban on exports in 2015, shipping more than 3 million barrels per day to buyers in China, South Korea, and across Europe.
To combat concerns about quality, producers and merchants are marketing barrels that come direct from the Permian Basin in West Texas and New Mexico, and pass from the wellhead through a pipeline straight to export facilities, as a way of distinguishing from barrels that first go north to the U.S. primary storage outpost in Cushing, Oklahoma.
“Quality reputation is crucial. Buyers ask about how well quality has been managed,” Suh Sok-won, president of South Korea’s SK Trading International, said earlier this year. “(U.S.) sellers are on alert and quality stability has improved. Otherwise we’re not buying oil from them.”
With new pipelines recently opening that connect the Permian to the growing terminal in Corpus Christi, shippers say they can promote the idea of pure Permian barrels.
“The consistent message that I continued to hear was: We want a clean barrel, we want a consistent barrel, and if at all possible, we want a neat barrel,” said Josh Baskett, vice president of oil and gas marketing for Continental Resources (N:CLR), referring to conversations with refiners from Europe and Asia.
Two new pipelines with 1 million bpd of combined capacity came online last month that flow to Corpus, where crude loadings have doubled to about 1.1 million bpd this month from 577,000 bpd, according to market intelligence firm ClipperData. Graphic: Corpus Christi crude vessel loadings climb, click https://tmsnrt.rs/30fwJsj
Trafigura is the biggest shipper on Plains All American Pipeline LP’s new 670,000 bpd Cactus II pipeline and its shipments now account for more than a quarter of the country’s total exports.
“The ability to control quality in Corpus will be dramatically better than the ability to control quality in Houston,” said Brian Freed, president of EPIC Midstream Holdings LP, in July, just before commercial deliveries on a new pipeline from the Permian to Corpus Christi started last month.
The Houston Ship Channel is still the most active Gulf port for loading crude barrels, according to Sandy Fielden, analyst at Morningstar, accounting for about 42% of barrels exported through August of this year, he said, citing RBN Energy Crude Voyager Data.
However, those barrels are often blended, as many of the pipelines to Houston first hit Cushing, the way station for numerous grades sourced from further north as well. Cushing is the delivery point for benchmark U.S. crude futures, where there is currently nearly 39 million barrels in storage.
“You have reputational issues for oil coming out of Houston because that’s heavily blended,” said Lucock.
Pipeline and terminal operators in Houston counter that Houston’s vast access to storage and access to Cushing gives shippers more options for marketing barrels.
In 2019, Corpus accounted for about 21% of exported barrels. Fielden said the EPIC and Cactus lines will boost share out of Corpus, benefiting U.S. sellers.
“We have to make sure that our barrel is segregated, it’s clean because otherwise we’re going to lose credibility in the international market,” said Continental’s Baskett. “Once you lose credibility with these Asian refiners, they’re done with you.”