In the midst of head-turning amounts of new U.S. oil production from old onshore basins is the curious case of the WTI/Brent spread, further putting onshore pipeliners to task and U.S. refiners in a tailspin to capture the lower-cost crude.

Refiner and fuel retailer Valero Energy Corp., for example, with 13 refineries onshore the U.S. and six of these along the Gulf Coast, was able to put an average of 37,000 barrels a day of Eagle Ford oil into its plants in the second quarter. The savings over using higher-priced seaborne oil was some $16 a barrel.

And, it wants more of this discounted liquid gold. Lane Riggs, Valero senior vice president, refining operations, says, “Today, we would run as much of it as we could.”

The company is expanding its South Texas plants and, to take more of producers’ growing amounts of Midcontinent oil output, it is expanding a plant in the Texas Panhandle.

Yes, much has changed in a short time. Bill Klesse, chairman, chief executive and president, says, “Those are projects that we would not have considered two years ago—would not have considered one year ago.”

On the other hand, in the U.S. Northeast, Sunoco Inc. has thrown up its hands where its plants are stranded with only Brent-priced imported oil. It plans to sell the refineries by next summer; if not, then it will simply shutter them.

Paul Sankey, energy analyst for Deutsche Bank, forecasts the double-digit Brent/WTI spread phenomenon will continue into 2013 at least. Into 2014, the spread should narrow into single digits, particularly as Libyan production is fully restored, he estimates.

Among U.S. shippers, intense risk/reward analysis is being run on new pipeline projects. While new onshore oil supply is fairly certain, its favorable pricing to Brent may change after 2014, according to Sankey.

Besides the proposed 500,000-barrel-a-day Keystone XL, that will stretch from Canada to the Gulf Coast, the proposed new Enbridge Inc. and Enterprise Products Partners LP “Wrangler” Cushing-to-the-Gulf-Coast project, at 800,000 barrels a day, has a good chance of moving forward, he says. And, although Keystone XL will experience delays, “at least one (of these pipelines) will be operational in 2013, and thus reduces the chance that the Brent/WTI differential will persist at a wide level beyond 2013,” he says.

“This would close the differential long term. If both of these two major pipelines are built, we believe it will take care of the projected…imbalance for the rest of the decade, regardless of what other pipelines were to get built or reversed.”

ConcoPhillip’s Seaway pipeline from the Gulf Coast to Cushing is being considered for reversal as well; however, Sankey doesn’t expect this to come to fruition.

While refiners want more WTI-priced oil, producers are seeking to capture a price more like Brent. For example, a great deal of oil production from the Bakken play in North Dakota is being readied to be shipped directly to the Gulf Coast by rail.

Greg Armstrong, Plains All American Pipeline LP chairman and CEO, says, “There will be shorter-terms solutions and then, inevitably, there may be some (take-away) overkill that goes on with respect to some of the longer-term solutions. So we end up with too much pipe coming out of (these new plays).

“But it's hard to forecast that at this point, because you don't know which of the many projects that have been announced are actually going to get done.”

Also at play is the type of new oil that onshore producers are surfacing. Armstrong notes that Eagle Ford and Bakken oil is light. Potential new oil supply from the Utica shale play in Ohio is light too. “So you're talking about probably an aggregate—no matter whose story you believe—of at least over 1 million barrels a day of (new), very light product. And it's going to change the dynamics in an industry that's been gearing up for heavy or sour product.”

Valero reports that it could process a total of 100,000 barrels of Eagle Ford oil per day at its South Texas plants, including through one of two units that predominantly handles medium to heavy, sour crude. Riggs says, “At the end of the day, it's all about economics. We can run Eagle Ford in that (heavy) crude unit. It's just a matter of (the oil) being available and the economics are right.”

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