Recent shifts in U.S. oil supply and demand patterns are testing the limits of the Nation's oil storage and transportation network. Upstream, a revolution in tight oil1 production, fostered by hydraulic fracturing and horizontal drilling techniques, has raised logistical challenges commensurate with the new sources of oil supply it has unlocked. Downstream, shifts in demand patterns and refining economics are opening a new chapter in supply logistics. Refinery closures in the Delaware Valley and the Caribbean mean that East Coast markets -- no longer as large as they once were, but still the Nation's largest - may become more reliant on product supply brought in from longer distances. On both counts, changing needs would significantly alter the web of pipelines, storage tanks and terminal facilities on which the oil industry and the Nation depend to link supply centers and end-users. But the overhaul of the midstream segment of the oil industry goes beyond expanding the infrastructure. The very nature of midstream services, their function in the Nation's supply dynamics, is being redefined.
As far as logistical assets are concerned, the mismatch between distribution needs and current infrastructure is becoming hard to miss. On the upstream front, the crude oil production boom in the Bakken calls for improved market access to that new source of supply. Depressed prices for new crude grades reflect infrastructure constraints. Inventory builds have caused stranded Bakken crude to trade at a sagging discount to benchmark West Texas Intermediate (WTI). Growth in Canadian production is also causing both heavy, sour West Canadian Select and light, sweet Canadian Syncrude to trade at deep discounts to WTI. Meanwhile, WTI's own discount to coastal and imported crude oil is again widening after announced delays in the Seaway pipeline reversal.
Downstream, East Coast and Caribbean refinery closures, if made permanent, would also require a midstream response. On paper, refining capacity in the more competitive Gulf Coast and Midwest hubs appears more than adequate to make up for lost East Coast refining capacity. But the Colonial pipeline, which connects Gulf Coast refineries to the Central Atlantic, is already running near capacity levels, so bringing incremental Gulf Coast product volumes to East Coast markets could be a challenge. And while refineries in Ohio and elsewhere in the Midwest could theoretically substitute for those in the Philadelphia area in supplying western Pennsylvania and upstate New York, here too lack of pipeline capacity is a problem. So is the limited ability of Delaware Valley terminals to receive more product imports in the short term, and the lack of connectivity between those terminals and product pipelines running west from Philadelphia.