Could Philadelphia Become 'Cushing East'?
Johnson and Jack Galloway, Canopy's president and a refining industry veteran, saw an opportunity that could provide an economic lifeline to struggling Philadelphia-area refineries: shipping light sweet crude oil produced in the Bakken Shale via unit trains to an independent Delaware River terminal facility tied into the region's well-developed rail network. The appeal of shipping domestically produced Bakken crude became evident after chatting with a former high school classmate who happens to be involved in commercializing reserves in the shale play, Johnson said.
"When the refineries shut down we realized that trains can be pointed anywhere and that these refineries can be enormously profitable with Bakken crude," said Johnson.
Philadelphia-area refineries traditionally have relied on light sweet crude oils from West Africa and other regions that produce crude priced to the Brent index. Refinery configurations in the region tend to be less complex than what one would find at facilities in the Midwest and Gulf Coast, meaning that they cannot process the higher levels of sulfur and other impurities present in heavy sour slates that refiners can acquire more cheaply. The Northeast also lacks crude oil pipeline capacity that could deliver domestic production priced to the WTI benchmark, which would enable East Coast refiners to avoid the premium Brent price.
Shipping domestically produced crude oil in rail tank cars is more expensive than transporting the commodity by pipeline, but Johnson and Galloway contend that bringing in 70,000 to 80,000 barrels a day on a unit train would still make the Philadelphia refining market dramatically more competitive. Recent trends suggest that processing Bakken crude rather than imported slates could save a refiner roughly $25 per barrel in feedstock costs.
Three eventual Philadelphia market developments signified a turning point in the region's refining fortunes. Two of these events helped to bolster the case for Canopy's proposal. First, Delta Airlines unit Monroe Energy purchased, upgraded and re-started the Trainer refinery. In addition, The Carlyle Group and Sunoco created a joint venture – Philadelphia Energy Solutions (PES) – that will keep the Philadelphia Refinery open.
The third development, which will have no bearing on demand for crude-by-rail, corresponds to Sunoco Logistics' decision to transform Marcus Hook into a natural gas liquids processing facility. Sunoco Logistics acquired the facility from Sunoco last month.
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