Lurking somewhere on the open seas, gargantuan ships capable of transporting nearly one-fifth of the U.S. daily crude production to more favorable markets await our supply. These very large crude carriers, or VLCCs, are longer than three football fields end-to-end and hold 2 million barrels (MMbbl) of oil. That’s four times the capacity of a typical Aframax oil tanker at 500,000 bbl, and twice that of the reigning big carriers, SuezMax, at 1 MMbbl.

But at present, because of their enormous size and deep draft when fully loaded, these ships can only dock at one port in the U.S., the Louisiana Offshore Oil Port or LOOP, situated 18 miles offshore. All other ports are too shallow.

Why should producers care? Because access to these floating leviathans is the final bottleneck to higher-priced global crude markets.

In July, U.S. crude production surpassed 11 MMbbl/d for the first time. That number is expected to march onward to 13 MMbbl/d and beyond, particularly fueled by the Permian Basin when its constraints become unclogged in the next year or two. That’s a lotta oil. Midstream companies are rushing to connect that rising tide from the Permian, Eagle Ford Shale and elsewhere to waterborne markets along the Gulf Coast. But where does it go once it hits the shoreline?

Through the first five months of 2018, crude exports averaged 1.6 MMbbl/d, per the Energy Information Administration. Once, it spiked to 3 MMbbl, not surprisingly when LOOP shipped out one of its two VLCC cargoes this year. Assuredly, other cargoes are leaving other ports, but on smaller ships. The problem with that? It costs more, eating into the arbitrage between West Texas Intermediate and Brent.

“VLCCs—with their 2 MMbbl capacity and rock-bottom delivery costs—are the most cost-effective way to transport crude to different markets like China and India,” said RBN Energy analyst Rusty Braziel in a report.

This certainly hasn’t gone unnoticed. The Port of Corpus Christi is positioning to become the only Gulf Coast port to accommodate VLCCs with a plan to dredge and widen its channel. Buckeye Partners, along with Phillips 66 and Andeavor, is building a terminal at the mouth of the port that can berth two VLCCs. It will come online in 2019. It is fed by the 700,000 bbl/d Grey Oak Pipeline coming from the Permian.

Throwing its hat into the ring, EnCap Flatrock-backed Moda Midstream LLC in early August said it would buy Occidental Petroleum Corp.’s Ingleside Energy Center in Corpus, featuring three deepwater berths with VLCC capacity in mind.

But the Corpus-docked VLCCs can only be half loaded, as the draw still won’t be deep enough for the full load of crude. After partial loading, the VLCCs will then need to reposition to deeper waters, where another ship will shuttle the remaining crude capacity from the shore. That, no surprise, costs more.

“The inability to load larger and more cost-effective vessels has pricing implications for U.S. crude oil exports,” according to an EIA report in May. “Using a number of smaller ships requires a wider price spread between U.S. crude oil and international crude prices to compensate for the lower economies of scale and costs associated with reverse lightering and partial loadings.”

Thus, to gain an advantage, other companies are developing offshore loading terminals in deeper waters, similar to LOOP, where VLCCs can be fully loaded. Kansas-based Tallgrass Energy LP, which is building an 800,000-bbl/d pipeline from Cushing to the mouth of the Mississippi River, plans an offshore terminal to be online by year-end 2021 with the ability to load VLCCs. Dallas-based Jupiter MLP has its sights on a VLCC-capable terminal 6 miles off the Texas coast in Brownsville. Trafigura, a commodities trader out of Switzerland, is developing a 500,000-bbl/d facility offshore Corpus Christi.

But the biggest terminal will be constructed by Enterprise Product Partners off the coast of Galveston. The Houston-based midstream firm is planning an 80-mile, 42-inch pipeline to feed the facility, which will load VLCCs in 24 hours at the rate of 85,000 bbl per hour.

“Given the long-term outlook for growing supplies of U.S. crude oil production, increasing global demand requiring supertankers, and the future limitations of Gulf Coast port and lightering capacities, we are confident this project will be embraced and supported by both domestic and international customers,” said Jim Teague, CEO of Enterprise’s general partner.

Analysts at Tudor, Pickering, Holt & Co. liked the move. “Facilitating efficient export loadings will be critical to avoid domestic pricing discounts as U.S. barrels increasingly join the expat community.”

And producers should too. Waterborne barrels on VLCCs add to the bottom line. If they can’t get to us, then we’ll stretch beyond the shoreline to come to them.

With this issue Oil and Gas Investor welcomes Hart Energy’s Midstream Business magazine and its readers to our fold. MSB will become a quarterly addition mailed to Investor’s readers, and it will feature a focused midstream theme in each issue. More is always better, wouldn’t you say?

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