Capacity of the vast infrastructure that moves crude oil to refineries from Canada and the Gulf Coast will be increasingly important as supplies tighten, according to Greg Armstrong, chairman and chief executive of Plains All American Pipeline LP.

The Houston-based firm, with $9 billion of assets, focuses on just such infrastructure: pipelines, oil and gas storage, and terminals. The company operates 20,000 miles of pipelines and 60 million barrels of storage, and has 500 trucks.

"There is a 10-million-barrel-a-day shortfall in U.S. oil supply and we now import two-thirds of our oil. We are certainly consuming more than we produce and all the PADDs are supply-deficient," he told Houston Producers' Forum members recently, as he called for expanding U.S. energy infrastructure.

Supply imbalances within the U.S. are a logistical challenge that affects availability and regional price, he said. "Just because they need crude in Chicago doesn't mean we'll ship it there from the Gulf Coast. If someone in Texas wants it and is willing to pay more for it, that crude will not be shipped to the Midwest."

Nearly 50 different grades of sweet and sour, domestic and foreign crudes flow through pipelines and not all refineries are able to process them. Some Canadian heavy oil is being shipped as far south as Beaumont, Texas, because heavy-oil refining capacity in the Midwest is saturated, he said.

Regional basis differentials also play havoc with the price, Armstrong said. West Texas Intermediate crude actually produced in Midland is priced as much as 60 cents per barrel differently than WTI traded on Nymex and sourced at Cushing, Oklahoma, where dozens of major pipelines converge.

"The market [on the Nymex] is dynamic and volatile and can suddenly go in one direction or another, so infrastructure is a key. Macro-issues determine the neighborhood but regional issues determine the local address (the price)," he said.

Oil production is rising in the Rockies, but that success is overloading the existing pipelines and trucking companies, which are also handling growing Canadian oil imports.

Armstrong advised producers, "I suggest you assess the purchaser of your oil and his infrastructure carefully. It's hard enough to find this stuff-don't low-ball your fees thinking you'll save money."



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