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Cushing oil glut worrisome

by: ROD WALTON World Staff Writer
Wednesday, July 29, 2009
7/29/2009 4:04:44 AM

Cushing's giant complex may be a crown jewel in Oklahoma's energy industry, moving millions of barrels of crude each week and employing hundreds of people.

Yet some state oil producers Tuesday told the Oklahoma Corporation Commission that the international success of the Cushing hub may be hurting them. The influx of Canadian crude coupled with slumping demand are putting downward pressure on Oklahoma oil prices, they say.

"It can get upside down really quickly," Harold Hamm, CEO of Enid-based Continental Resource Inc., told commissioners during a meeting in Oklahoma City. "It makes us wonder what we're looking at in the future."

Cushing is the West Texas Intermediate price delivery point for the New York Mercantile Exchange. A variety of companies, from infrastructure outfits such as Matrix Service Co. to midstream operators like SemCrude, are centered at the hub.

Pipelines owned by Enbridge Inc. and others can bring more than 1 million barrels daily into the interchange, according to reports. Cushing has about 50 million barrels of storage capacity, with close to 40 million used these days.

Those eye-catching numbers are what's bothering producers who normally take a hands-off approach to government involvement in the oil industry. They are concerned that too much Canadian crude is flowing in and not enough Oklahoma product can flow out to other potential markets.

"The commission ought to use whatever authority it has to make sure that we who are in the state are not disadvantaged," Hamm said.

Commissioner Jeff Cloud called the meeting, which was described as informational and not intended to result in action.

Some of those attending wondered whether the state could offer tax incentives to Oklahoma producers and pipeline operators for moving product out to competitive markets.

Other industry leaders were not so alarmed at the negative price differentials hitting Oklahoma Sweet and West Texas Intermediate. Devon Energy Corp.'s Todd Morgan acknowledged the topsy-turvy price differentials but also noted that the recession and supply disruptions from Hurricane Ike last year all play a part in market volatility.

"These conditions rarely last long," said Morgan, who is vice president of crude oil and natural gas liquids marketing at Oklahoma City-based Devon. "Left alone, the market will find the right solution."

John Keffer, vice president of Plains All American Pipeline LP, estimated about 1.2 million barrels of daily capacity comes into Cushing, with another 1 million barrels potentially going out. When it comes to import balances, he said, that increase in Canadian crude is countered by a drop in Mexican and Venezuelan oil entering the U.S.

"What we see is Canadian crude not shutting in U.S. crude for any significant period of time," Keffer said.

Mike McDonald, chairman of the Oklahoma Independent Petroleum Association, warned that every $1 drop in Oklahoma crude equates to $8 million lost in gross production taxes and other state revenue. He is worried about price differentials going several dollars ahead of Louisiana Sweet to several dollars below and wondered whether the state should tax oil stored at Cushing more than 30 days.

"If we do nothing, is our crude oil market in a few years going to be similar to Kansas?" McDonald asked.

The Keystone pipeline, a 2,100-mile effort by TransCanada to ship crude from oil sands facilities in Alberta to Cushing and elsewhere, could be completed next year. The line could bring an additional 400,000 barrels per day, while another leg to take oil from Cushing to the Gulf Coast could be finished by 2012, according to reports.

Commissioners Cloud and Dana Murphy believe their regulatory panel needs to stay aware of the volatile price differentials and whatever reasons are pushing those changes. They stopped short of endorsing any actions but hoped to hear more from producers at future meetings.

"This is not meant to be the last of these," Cloud said.

Rod Walton 581-8457
rod.walton@tulsaworld.com

Associate Images:

A worker monitors an automated manifold as it directs the flow of oil at the Enbridge Inc. Cushing Terminal. West Texas Intermediate crude traded on the New York Mercantile Exchange is delivered and stockpiled at Cushing. Shane Bevel / Bloomberg News file

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