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The Wall Street Journal: Oil Demand Buoys Import Hub

EXTRACT: Loop’s three owners, Marathon, Royal Dutch Shell PLC and Murphy Oil Corp., are debating whether to implement phase two. The project would add capacity to the pipeline, the sole barrier to increasing the amount of oil shipped through the port.

By BRIAN BASKIN
April 4, 2007; Page B5C

GALLIANO, La. — Stationed in a cluster of squat offices in Louisiana cattle country, a small crew keeps watch over the Ellis Island of foreign oil.

In one building in the Louisiana Offshore Oil Port’s, or Loop, central command complex, cameras fixate on three buoys bobbing in the Gulf of Mexico 40 miles away. The buoys demarcate where supertankers deliver crude to the only points on the U.S. coastline capable of receiving such large oil vessels. Computers in a second building track Loop’s pipeline as it comes onshore, terminating just north of Galliano. Some of the crude will be stockpiled at Loop; for the rest, the process will end days later at refineries from Texas to Illinois.

Loop has gotten busier as U.S. demand for imported oil has risen. The queue of tankers has lengthened, with the pipeline consistently brimming near capacity and the storage caverns always full. The once-underused import hub is being reviewed for a possible expansion to the pipeline, which already carries 12% of U.S. imports.

But as the oil industry spends billions to add global production capacity, other trends suggest the timing is wrong for the first expansion in Loop’s 26-year history. The conventional wisdom holds that even though imports will keep rising, much of the foreign oil will come not from supertankers from the Middle East, but via pipeline from Canada. “We continue to do studies around [expansion],” said Gary Heminger, executive vice president at Marathon Oil Co., which owns a majority stake in LOOP. “We do not have enough demand yet.”

The uncertainty underscores the central paradox of Loop’s existence: Despite playing a central role in securing the nation’s oil supply, the deepwater-port concept remains more popular on paper than in practice.

Mr. Heminger’s words harken back to Loop’s early years, when the port was seen as more of a white elephant than an import hub.

As construction wrapped up in the late 1970s, Loop was thought to usher in the era of the supertanker, massive vessels capable of carrying two million barrels of imported oil, or up to twice as much as the next-largest tanker class. The port’s designers labeled the finished facility phase one, building in the ability to double capacity from the original 1.4 million barrels a day. Oil firms envisioned a network of similar ports spanning the U.S. coastline.

But soon after taking its first shipment, Loop’s president sounded a different note. “A year ago we were trying to get support to double our capacity, but we couldn’t get the oil companies to provide the guarantees we needed to finance the expansion. I’m glad we didn’t get it,” William Read, then-president of Loop, told the New York Times in 1981.

Phase two remains confined to blueprints. Loop opened for business when oil imports were declining, on the heels of the 1979 energy crisis and just before the start of a recession.

Five years after opening, Loop ran at one-third capacity, and lost money. Oil imports began to pick up, however, and the port moved into the black in 1990. Loop has since been consistently, if unspectacularly, profitable and notched its highest profits in 2005, with $73.9 million in net income on $184 million in revenue, according to Standard & Poor’s.

Rising imports have never led to a broader embrace of the LOOP model, however. In 1990, a consortium of 14 oil companies scuttled a proposal for a deepwater port off the coast of Texas over concerns about future demand for foreign oil.

More recently, Unocal Corp. in 2003 weighed a deepwater port 100 miles south of Beaumont, Texas. But Unocal, now part of Chevron Corp., shelved the idea after it failed to secure enough pipeline commitments.

Those plans fell victim to what PFC Energy consultant Paul Tossetti describes as chronic second-guessing in the oil industry when it comes to building for the future. “There’s been a great deal of uncertainty about where future crude supplies might come from,” he said.

Loop’s three owners, Marathon, Royal Dutch Shell PLC and Murphy Oil Corp., are debating whether to implement phase two. The project would add capacity to the pipeline, the sole barrier to increasing the amount of oil shipped through the port.

With the space to expand the pipeline already built into Loop’s infrastructure, the decision will hinge almost completely on whether enough refiners sign up for the added capacity to justify the construction expense.

“We’re still trying to gather commitments to make the pipeline expansion happen,” said Loop spokeswoman Barb Hestermann. “Nothing definitive has been decided yet.”

On the surface, the numbers support a bigger Loop. U.S. oil production is expected to increase slightly as large fields in the Gulf of Mexico come online, but energy analysts expect imports to meet the bulk of new demand. By 2027, refiners will be importing an additional three million barrels a day above present levels, the Energy Information Administration predicts.

Alternative ways to deliver crude have kept LOOP from charging more for its services, even as pipeline space has become tight, said Aniki Saha-Yannopoulos, a Standard & Poor’s analyst.

The calculus on whether to expand Loop also rests on the level of Middle Eastern crude imports, expected to be flat in the coming years. Imports from nations along the Persian Gulf last year fell to their lowest levels since 1998, according to the EIA.

Oil from the Canadian province of Alberta — transported by pipeline — is displacing Gulf Coast crude at Midwestern refineries. The Midwest accepted 350,000 fewer barrels a day from the Gulf Coast in 2006 than it did five years earlier, according to the EIA. Canadian imports rose by 420,000 barrels a day over the same period, data show.

Canadian crude could find its way to Marathon’s Garyville, La., refinery, just 75 miles north of Loop, to meet expanding capacity there, Mr. Heminger said.

Loop faces other challenges beyond the Canadian invasion. Venezuelan and Mexican crude, some of which arrives in the U.S. via LOOP, is also on the decline, Mr. Tossetti said, while African crude, typically brought on smaller tankers that can offload on the East Coast, is on the rise.

Either way, the Middle East will likely play a secondary role in the import picture until new supplies from the Gulf of Mexico, Canada and Africa decline.

“It’s very muddied,” Mr. Tossetti said. “If you want to look really long term, U.S. crude production is going to go down in the next 10 or 20 years…then you have to go to longer-haul crude.”

The prospect for the first major expansion of refinery capacity in 30 years is also in question. Refiners have announced they will add 1.75 million barrels of expanded capacity by 2010, with much of the growth coming in the Gulf Coast, according to data compiled by the EIA.

 

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