PBF Energy has recently crafted an unorthodox trade: Delivering a 500,000 bbls Kearl Lake cargo (Albertan) to Philadelphia through Panama by LR2 tanker.
U.S. oil refiner PBF Energy Inc is shipping a cargo of crude from Western Canada to supply its plant on the other side of the continent, a rare move traders say is a sign steep discounts for oil sands are upending age-old trade routes.
The deal set the market abuzz with traders speculating about the status of the shipment of up to 500,000 barrels of crude.
The expectation for a such move you would normally come from guys like Freepoint Commodities (not PBF).
PBF, the New Jersey energy company owns roughly one-third of the East Coast refining capacity.
The refiner already lease 2,500 railcars to ship Western Canadian and Bakken crude to its East Coast refineries taking advantage of the opportunity to run discounted slates reaping the associated economic benefits.
Refining 101: it is a very tricky industry:
Shale oil opportunities present to refiners like PBF challenges as these slates contribute to crude blending compatibility, yield (lower vacuum gas oil and resid) and product quality issues (more paraffinic and high pour point).
Opportunities from heavy oil also present to refiners product quality issues (feed contaminants, unit poisoning).
Kearl is a heavy, high sulfur crude produced by Imperial, one of Canada’s largest oil company which also owned the Edmonton South Refinery.
During the month of July, the refinery was operating at <75% of its 187,000 bbl/day nameplate capacity.
The Western Canadian Select (WCS) was in the $27 low-end and the WTI/WCS ex-edmondton has reached $18/bbl.
Heavy/Light declines are generally beneficial for coking refineries.
Kearl is a coker feed that has an excellent HVGO and Vaccum Residue yield.
In a low-cost crude environment, this vaccum residue yield translates to a margin uplift on stinky co-products such asphalt, petcoke, sulphur whose value do not/less fluctuate with oil.
The Trans Mountain Pipeline’s flow is 300,000bbls per day.
The pipeline connects the Edmonton-south terminal which has 8mmbbls of storage capacity to the Westridge terminal located in the marine port of Vancouver, BC.
There are no big refineries in the Vancouver area except Chevron.
TMP delivers 31% of Puget Sound (BP, SHELL, TESORO, U.S Refining co., P66) supply (PADD-V) @ 92% capacity.
Trans Mountain Pipeline Expansion Project, National Energy Board
Kinder Morgan (TMP) signs 10 years throughput contracts with Puget Sound refiners, the pipeline is oversubscribed by over 70%. (KMI has a natural monopoly over Westbound Albertan crude)
The NEB regulates only supplies going into Chevron’s Burnaby.
Despite a wide WCS/WTI spread, Traders say that if you do not have line space, you will automatically lose your pants.
Many including Petrochina and Reliance Industries have tried and lost.
It is true that Kearl lake is produced by Imperial in Alberta but the parcel was bought ex Edmondton (not ex Burnaby) so we think they must have lost everything they have gained in the WCS/WTI because of the Trans-Mountain leg.
Thomas Malley (Ex-Phibro) buys refineries and turns everything upside down.
He is crack-trader, not an crude oil marketer: his knack is optimizing streams/co-products to extract their value.
This is how PBF faces the market “abuzzz” with traders.
So sending a Kearl by tanker on a 7,000 miles trek through the Panana Canal to the Delaware (PADD I) might not be the arbitrage of an oil trader, but for a virtuoso who understands the economic value inside a refinery; absolutely it is.
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