Should all, or even just a few, of the proposed US Gulf crude oil terminals be completed, crude oil exports from the region will be one of the biggest draws on VLCC demand
The US Energy Information Agency (EIA) estimates that annual average US crude oil production reached a new record of 12.2M b/d in 2019, up 1.3M b/d from 2018. The EIA forecasts that US crude oil production will average 13.3M b/d in 2020 and 13.7M b/d in 2021. The increase in production is mainly driven from the Lower 48 states’ onshore regions, especially the Permian region.
The disparity between the locations of the refineries, the type of crude oil they can refine and the key regions of consumption in the USA means that it will be some years yet before the USA is totally crude oil independent, but the day is approaching. In December 2019, the IEA reported that US crude oil exports exceeded crude oil imports by 89,000 b/d. The switch to a net exporter of crude oil is a tribute to the remarkable speed of development of US shale oil, from 0 bpd in 2010 to 7M b/d at the start of 2020. This remarkable expansion is having serious ramifications for the tanker market. According to IEA by 2024, the US will double its crude oil exports to 4.9M bpd.
But that will only happen if the US crude oil can reach the export markets efficiently. The inefficiencies currently lie in the import-orientated design of the US crude oil system. This is now being revamped with a focus on exports, with new and/or reversed pipelines from the Permian Basin to new or adapted crude oil terminals on the US Gulf coasts. For VLCCs to berth and load a full cargo requires approximately 75 ft (23 m) of water, whereas most ports in the region are 40-50 ft (approximately 12-15.5 m) deep at the jetty. The solution is to either modify existing facilities or use single point mooring (SPM), which is already used extensively cross the globe and in the US Gulf for offshore crude oil exports.
However, this restricts current VLCC activity in the region to two working scenarios, according to global independent shipbroker SSY. One is for VLCCs to deliver cargoes into the US Gulf, then load export cargoes, which results in them spending three to four weeks in the region. The second is that VLCCs are ballasting into the US Gulf and spending between one- and three-weeks part loading at Moda Ingleside (see table). SSY notes that increasing Brazilian crude oil exports will add to the attraction of VLCCs ballasting into the Atlantic.
Into the LOOP
Currently, only the venerable Louisiana Offshore Oil Port (LOOP) has the capacity to fully load a VLCC. LOOP was designed in 1972 to unload the largest tankers of the day, and in 2017 modifications were made to adapt the facility to load the first VLCC with US crude oil in 2018. The debut export cargo was booked by Shell’s Houston trading arm and shipped on the Bahri owned 2017-built VLCC Shaden. The facility is a joint venture between Marathon Pipe Line LLC, Shell Oil Company, and Valero Terminalling and Distribution Company. LOOP has a potential throughput of 1.2 Mb/d and appears to be operating at an export capacity of an average of one VLCC per month.
Since then, other VLCCs have carried US crude from other facilities, but only by part loading the tanker and lightering to full capacity. With crude oil production and exports projected to grow, the oil majors and independents are investing in new large tanker crude oil facilities all along the US Gulf. Most projects require approval from the US Maritime Administration (MARAD).
Tanker Shipping & Trade has identified 14 projects (see table) at various stages of completion. If all the proposed projects are completed, nine terminals will have the capacity to load VLCCs. Only one is currently active (LOOP). One project now appears to be on hold after Canadian oil company Enbridge announced it was withdrawing from the Crude Offshore Loading Terminal (COLT) project, in favour of taking part in the Enterprise Product Partners Sea Port Oil Terminal (SPOT) project.
The COLT project was seeking approval from MARAD. The SPOT project is at the MARAD stage, as is the Texas Gulf Terminals (TGTI) project. The latter is located in Corpus Christi and is sponsored by commodity trader Trafigura; it will have capacity to serve VLCCs.
Another Corpus Christi-located project that has reached the MARAD stage is the Phillips 66-sponsored Bluewater Texas Terminal. This is located in deep water and will use SPM to serve VLCCs. This is also the route to market chosen by the Harbor Island Carlyle Group and Lone Star Ports joint venture. In fact, seven of the 14 identified projects are located in Corpus Christi, including the Moda Ingleside facility and NuStar Energy’s Corpus Christi North Beach, which currently load Suezmax tankers. There are plans to expand these facilities to VLCC size.
At a much earlier stage of development is the Plaquemines Liquids Terminal (PLT) which will be located at the Port of Plaquemines, just 20 miles from the mouth of the Mississippi. The sponsor is Tallgrass Energy, which aims to connect the terminal to the pipeline hub in Cushing, Oklahoma.
Also at the development stage is the Jupiter Offshore Loading Terminal (JOLT) project in Brownsville, Texas. This aims to be live in 2021 and will be the receiving end of a 1,000 km-long pipeline connecting to the oil fields in West Texas.
Tracking the potential capacity of these projects is difficult as they are listed by storage capacity, which is not the same as the loading rate. However, five of the projects at the MARAD stage are using SPMs and should have a loading capacity at least equal to, if not higher than, that of LOOP. But it is likely that LOOP will also de-bottleneck and increase capacity in the meantime.
How many of these projects will reach the completion stage remains to be seen. If only a few succeed, it seems reasonable to assume that US Gulf crude oil exports via VLCC will double in the next few years. With a supportive investor base, embedded Jones Act domestic trade, a surplus of crude to export and a raft of new terminals on the horizon, the US tanker industry is on a firm footing for future growth.
|Table of Current and Future US Crude Oil Export Terminals|
|1||Louisiana Offshore Oil Port (Loop)||LOOP Inc||Grand Isle, Louisiana||VLCC||Live|
|2||Jupiter Offshore Loading Terminal (JOLT)||Jupiter MLP LLC||Brownsville, Texas||VLCC||Funding|
|3||Sea Port Oil Terminal (SPOT)||Enterprise Products Partners||Corpus Christi, Texas||VLCC||MARAD|
|4||Texas Gulf Terminals (TGTI)||Trafigura||Corpus Christi, Texas||VLCC||MARAD|
|5||Plaquemines Liquids Terminal (PLT)||Tallgrass Energy||St. James, Louisiana||VLCC||R&D|
|6||Moda Ingleside||Moda Maritime||Corpus Christi, Texas||Suezmax||Live|
|7||Corpus Christi North Beach (CCNB)||NuStar Energy||Corpus Christi, Texas||Suezmax||Live|
|8||Seabrook Logistics||Magellan Midstream & LBC Terminals||Seabrook (Houston), Tx||300,000 bbls||Live|
|9||Corpus Christi Infrastructure (CCI)||Castleton Commodities||Corpus Christi, Texas||Suezmax||R&D|
|10||Pin Oak Holdings||Pin Oak/Mercuria||Corpus Christi, Texas||Suezmax||R&D|
|11||Crude Offshore Loading Terminal (COLT)||Enbridge / Sentinel Midstream||Freeport, Texas||VLCC||On hold|
|12||Bluewater Texas Terminals LLC||Phillips 66||Corpus Christi, Texas||VLCC||MARAD|
|13||Harbor Island||Carlyle Group / Lone Star Ports||Corpus Christi, Texas||VLCC||MARAD|
|14||Texas GulfLink||Sentinel Midstream||Freeport, Texas||VLCC||MARAD|
|Source: Compiled by RMM|
USA: home to some of the largest publicly listed tanker companies
US stock exchanges offer tanker companies a quick and relatively easy route to raising funds, but investors do not always seem to understand the cyclical nature of shipping.
The USA is home to 49 tanker companies, of which 14 are publicly listed. This gives them access to a huge investor base and many companies could not have grown as quickly or accomplished mergers and acquisitions as efficiently as they have without access to this source of funding. However, as anyone who has attended a shipping finance conference will know, the chief executives of publicly listed tanker companies can often be heard to complain that US investors consistently undervalue their firms.
As an example, at the time of writing (early January 2020) the 34-strong tanker fleet of International Seaways had an estimated value of US$1,200M, according to VesselsValue. It is reasonable to assume that the market capitalisation would reflect this, but not so. The market cap is ‘only’ US$868M. The gap represents a value proposition for investors. In explaining the difference, International Seaways’ chief financial officer, Jeff Pribor, described the discount as “technical headwinds” due to the company’s background of being part of a debt-for-shares arrangement.
Most of those swapping debt for equity have sold off their positions, lowering the share price. But this does not alter the fundamental value of International Seaways’ tanker fleet. With the large tankers enjoying an IMO 2020 boost, the share price looks undervalued. International Seaways’ president, Lois K Zabrocky went even further, claiming the company represented “one of the best bargains out there, if not the best.”
The US Jones Act: controversial or just mis-understood?
Officially known as the Merchant Marine Act, 1920, the US Jones Act is one of the best known pieces of US maritime law affecting domestic tanker trades, but it is also one of the most divisive.
The Merchant Marine Act, 1920 states that: It is necessary for the national defense and the development of the domestic and foreign commerce of the United States that the United States have a merchant marine:
Wesley Jones, a Republican from the State of Washington, was the sponsor of the Merchant Marine Act, 1920 and gave his name to the most widely used version. His introduction of the US Jones Act effectively forced shipping in Alaska to only use shipping companies based in the State of Washington. That situation continues to this day – Alaskan crude oil is only shipped on US-built and operated tankers. Furthermore, the movement of crude oil and products between US ports is reserved for US tankers and several US companies are committed to this trade.
This cabotage element is the main controversy surrounding the Jones Act, with opponents highlighting the higher costs compared to foreign-built and operated tankers and that the Jones Act encourages owners to delay newbuildings.