Is the U.S. Gulf Coast the New Cushing? – Marathon Petroleum Corp (MPC), Kinder Morgan Inc (KMI)

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As the Financial Times wrote last year, the crude oil trade is “in throes of an historic shift.” U.S. Gulf Coast refiners, which had relied on imports of light sweet crude oil from OPEC nations for years, have drastically reduced such imports, courtesy of rising domestic oil production.

A number of pipeline projects – some already in service and others expected to come on line this year – will provide Gulf Coast refiners with more oil than they ever dreamed of, flowing from major production centers like the Eagle Ford Shale and the Permian Basin.

According to some experts, this sharp increase in pipeline capacity to the Gulf could overwhelm local refineries, many of which are ill-equipped to process the lighter grades of crude oil flowing from the Eagle Ford and the Permian.

They argue that this coming deluge of crude to the Gulf will turn the region into the new Cushing, with major consequences for domestic crude oil prices. Let’s take a closer look.

Gulf Coast light oil imports fall
As the production of light oil has increased drastically over the past five years, led by increases in production from the Eagle Ford, the Bakken, and the Permian Basin, Gulf Coast refineries have become less reliant on foreign light crudes from places like Nigeria.

In fact, light crude imports processed in the U.S. Gulf Coast, or PADD 3, fell to less than 0.8 million barrels per day in the first half of 2012 from an average 1.2 million barrels per day in 2010. Tellingly, Phillips 66 (NYSE: PSX) recently announced that it expects to process 80% more domestic crude this year than it did in 2012.

And Marathon Petroleum Corp (NYSE:MPC) also plans on using much greater quantities of North American crude, having recently boosted capacity at its Detroit refinery by 13%, to 120,000 barrels per day, in order to process Canadian heavy crude, which is even cheaper than Bakken and other grades of domestic crude. Both companies reported fourth-quarter earnings that blew Wall Street estimates out of the water, due largely to their increased access to heavily discounted inland crudes.

New pipeline capacity
Going forward, this trend is expected to continue as increasing pipeline capacity delivers vast quantities of light, sweet crude to Gulf Coast refiners. For instance, the expansion of the West Texas Gulf Pipeline, the Longhorn reversal project, and the first and second phases of the Sunoco Logistics Permian Express Pipeline – all slated for completion this year or the next – are expected to provide a substantial boost to takeaway capacity from the Permian Basin.

Similarly, new projects serving the Eagle Ford region are also expected to go on line this year, though several major ones have already been completed. For instance, one of the biggest pipelines serving this play, the Eagle Ford Enterprise pipeline, went into service last year.

The 147-mile pipeline runs from Lyssy, Texas, to Sealy, Texas, with a targeted capacity of 350,000 barrels per day. At Sealy, the pipeline connects to Enterprise Products Partners L.P. (NYSE:EPD) Rancho pipeline, which connects directly to the Gulf Coast refining complex and the Enterprise Crude Houston (ECHO) oil terminal.

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