As the booming supply continues to overturn prices, pipeline companies have emerged as some of the most successful crude traders in North America.
Favoured by investors seeking steady income and low risk, pipeline groups - the toll-road operators of the energy market - traditionally make their money transporting crude for others. Today, some US and Canadian operators are scoring significant profits from buying and selling their own crude. A move which critics claim raises the possibility of a conflict with customers.
Pipeline groups, which own the transportation infrastructure needed to move oil to more expensive markets, have joined trading houses to exploit the arbitrage opportunities. This is particularly the case in North America, where a growing surfeit of inland crude faces bottlenecks getting to refineries and has left oil discounted by as much as US$ 50/bbl relative to global prices.
Profits rose 170% last year to US$ 647 million at the merchant segment of Plains All American Pipeline – a partnership with 16 000 miles of pipelines, hundreds of trucks and thousands of leased railcars – making it the biggest contributor to the company’s earnings before interest, tax, depreciation and amortisation of US$ 1.6 billion.
“Crude oil production increases in certain regions have exceeded local demand and existing infrastructure capabilities. [Our] assets and business model are favourably positioned to help balance certain over and undersupplied markets,” it said.
It is a similar story for Sunoco Logistics, which has 4900 miles of crude pipelines, which saw profit in a business that buys and sells oil soar 281% to US$ 137 million. Profit margins on the 663 000 bpd of crude it purchased, about 0.7% of global supply, trebled.
Profits more than doubled to Cdn$ 55 million (US$ 22.2 million) last year for the energy services team at Toronto-listed Enbridge, as it bought crude in cheap locations and moved it to hubs where prices were higher.
In comparison, the profits of Geneva-based oil traders were mostly up 20% year-on-year and a few were flat.
According to Richard Bird, Chief Financial Officer, locational arbitrage was the “single most important of the strategies in 2011”.
This was supported by Brad Olsen, Midstream Analyst at Tudor, Pickering, Holt, who said: “We’re probably in a multi-year cycle where guys are going to use their infrastructure assets to capture market arbitrage opportunities.”
As regulated pipelines are common carriers, this means they cannot discriminate among shippers including in-house trading groups. In some cases, the government sets tariff rates.Still, some pipeline operators decline to trade oil. “We don’t compete with our customers,” said Mike Mears, Chief Executive at Magellan Midstream.
Read the article online at: https://www.worldpipelines.com/business-news/06032012/north_american_pipeline_companies_benefitting_from_booming_supply/