Crude Oil and Product Fundamentals
To effectively manage the crude and products supply, trading, scheduling and logistics function, S&T departments are often organized by what is called a tributary supply network or hub.
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All key personnel associated with crude scheduling, refinery planning, trading, and product scheduling are usually located adjacent to each other on a trading floor to streamline decision making and shorten communication lines in the rapidly changing day-to-day supply environment.
Most oil company Supply and Trading functions focus attention on a supply network around a refinery.
In Europe, one major oil company could have over 25 different supply networks across the continent. In the US, many S&T functions are organized by the major geographic refining and supply centers, e.g.:
- US Gulf Coast
- East Coast and New York harbor
- West Coast and Alaska supplies
- The Midwest – Chicago market
In major trading houses (those without refineries), Supply and Trading functions are organized around either bulk terminal assets, major pipeline connections or marine supply points.
To understand the importance of crude oil and product transport, one must understand the role of logistics hubs in Europe and the US. Logistics hubs serve as gateways for regional supply. Hubs are at the core of the US and European oil markets’ efficiency, providing an ability to quickly respond to changes in supply and demand.
Hubs are often characterized by:
- interconnections among many pipelines,
- being adjacent to other modes of transportation — such as tankers and barges, rail, and trucks for local transport, and
- having substantial storage capacity.
Hubs allow supply to move from system-to-system across European countries, and in the US, across states and regions.
Any regional supply/demand imbalance is quickly reflected in prices at the region’s hub. The hub’s supply and storage options then allow traders to take advantage of any price disparities and adjust supply and demand to restore balance. They also set the price differentials between one hub and another.
Often a major global refining center (US Gulf Coast, Rotterdam, Singapore, Japan) is not adjacent to the large market centers. This causes a need for a large volume of day-to-day crude and product movements through pipelines, by marine vessels, or rail.
Most mature markets have a wide network of pipelines used to move refined products. This creates a very efficient distribution system not only from the standpoint of the physical movements, but also allowing crude and product exchanges that will be discussed later.
As an example, in the US, over 100,000 miles of products pipelines exist as well as another 80,000 – 90,000 miles of crude pipelines. To put this in perspective, the US interstate highway system is 55,000 miles. There are almost four interstate highway equivalents in crude and product pipelines.
Developments of shale resources in the US have complicated this infrastructure, as many new producing areas, such as the Bakken shale in North Dakota, are not located near existing pipeline infrastructure. This has led to an explosion in crude oil shipments by rail. While this is not as cost effective as a pipeline, it is more flexible in choosing final shipping destinations.
Marine movements allow for maximum flexibility in inter-regional and coastal moves of both crude and products. There are over 4,000 vessels available to oil companies and traders through a variety of domestic and international ship owners. There is a 24/7 global network of brokers and agents that represent ship owners who charter vessels to shippers, called charterers. The market is very competitive and vessel pricing is available though a number of electronic services.
The chart shows the complexity of scheduling crude to the refinery. For host country or domestic crude sources, it starts with wellheads, pumping units and gathering systems in onshore or offshore production fields. Most inland refineries are fed by pipeline. Typically, US lease production is first moved by tank truck or tank car to get to a crude oil pipeline.
Many countries have large, diverse sources of crude oil, where an elaborate crude oil pipeline system feeds the refineries. Imported crude arrives by marine vessel and marine receiving terminals do exist at many refineries. This is especially true in the major global refining centers.
In the US Gulf Coast, the Louisiana Offshore Oil Port (LOOP) offshore facility is 25 miles from the coast. Crude is offloaded in the Gulf of Mexico, using a Single Buoy Mooring (SBM) unloading facility. This enables LOOP to receive Very Large Crude Carriers (VLCC’s) – which are too big to come into shallow water to unload. Crude is then brought into the Louisiana shoreline and fed into the crude pipeline network which connects to over 50% of the US refineries.
A similar VLCC offshore crude oil facility has existed since the late 1960’s in Bantry Bay, Ireland.
The chart shows the major marine movements of crude oil which are a very large portion of international marine tonnage because the:
- Major crude supplies (Middle East & Russia) are far from
- Major refining centers in the US Gulf Coast, Rotterdam, Singapore, Japan.
Refined product tonnage is another major component of marine movements, with
- Large movements between refining centers (e.g., Europe & the US) to balance supply-demand, and
- The construction of more export refineries, especially in the Middle East and South East Asia.
As a note, freight rates for marine movements vary widely by:
- ship size
- ship type (crude, clean and dirty product), and
- the regional voyage.
Crude and product, clean and dirty freight rates are published daily for important regional move. Worldscale (WS) is the standard system for assessing freight rates.
Two terms are important to understand in marine freight rates:
- Once a year, a set of base voyage costs (including bunker fuel, port costs, etc. for both laden and return voyages) is published for a theoretical standard vessel moving between each of the world’s main loading and discharging ports. This is called the WS Flat Rate.
- Spot freight rates are commonly expressed as percentages of these theoretical standard rates. For example, if VLCC rates are said to be WS67, the actual rate is two-thirds of the flat rate published at the beginning of the year.
Daily spot freight rates vary widely as ships come in and out of the fleet, affecting supply/demand of a particular ship size and type.
The spot freight rate is driven by four major supply/demand factors:
- How old is the ship and the size of the fleet?
- How much demand is there for a particular movement?
- How many ships are available? Because ships are being scrapped and new ships are constantly being built.
- Last, what are the prevailing contracting terms and methods? Are ship owners looking for term or spot contracts?
The chart indicates the complexity of movements and scheduling of refined products such as gasoline and diesel. Once they are produced in a refinery, the term bulk network is used to define large movements of refined products by marine and pipeline.
This includes third party, common carrier pipelines and the bulk tanks along the pipeline network. Refineries make product to common carrier pipeline specifications because most pipelines have their individual set of product specifications and grades.
Refined products are also often moved by smaller marine vessels or barges.
For example, in Germany’s Rhine River and the US Mississippi River system, inland barges are used to supply terminals along the river.
Smaller, coastal tankers also move products from refineries to markets along the coast of Malaysia from the Singapore refineries, or from the refineries along the California coast in the US.
The rack network is defined as movements beyond a terminal – primarily by tank truck or rail tank car.
The Supply and Trading (S&T) function manages the bulk network. The marketing-distribution function handles the rack network portion of the distribution system.
As discussed, in most global markets crude and products are moved by marine, pipeline or overland by rail or road. On a volume basis, pipeline and marine are dominant. Both rail tank cars and tank trucks are also needed for the final leg of distribution to customers.
When you look at the chart for the US, the way the industry measures refined product volume movements is by barrel miles, not just barrels but how many miles did that barrel move.
In the US, pipeline product movements are about 62% of the total. There’s a big move to replace a lot of the surface movements with pipelines because they are cheaper and safer to operate.
From a cost per mile standpoint, pipelines are the most effective means of refined product transportation.
The chart illustrates an example of the cumulative cost to transport gasoline from the US Gulf Coast to a Boston service station.
Note that:
- Starting with a pipeline move of 1,500 miles the cost is only 2.3 cents per gallon for the entire move.
- Then, the barge move is three times pipeline cost – for only 250 miles, and
- The truck move is now 25 times the pipeline cost – for the last 40-mile delivery to a customer.
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