U.S. refiners turn to tanker trucks to avoid 'dumbbell' crudes

By Kristen Hays

HOUSTON (Reuters) - In a pressing quest to secure the best possible crude, U.S. refiners are increasingly going straight to the source.

Firms such as Marathon Petroleum Corp and Delek U.S. Holdings are buying up tanker trucks and extending local pipeline networks in order to get more oil directly from the wellhead, seeking to cut back on blended crude cocktails they say can leave a foul aftertaste.

While the business of hauling crude from individual oil wells to bulk storage depots or pipeline hubs has become a lucrative niche in recent years thanks to the shale oil revolution, refiners are getting into the "first mile" game for a different reason: taking control of their supply chains to secure a more predictable, consistent stream of crude.

Phillips 66, the nation's fourth-largest refiner, has added trucks and offloading equipment at several of its refineries to help reduce its reliance on oil coming from Cushing, Oklahoma, the nation's biggest crude oil crossroads and storage hub. Here, a growing volume of Canadian oil sands is often mixed with lighter domestic shale crude, resulting in blends that can be less profitable than similar oil fresh from the field.

Phillips 66 executives say operations at its 200,000-barrel-per-day refinery in Ponca City, Oklahoma, only 62 miles (100 km) from Cushing, have improved since it began getting more of its crude directly from wells in the Mississippian Lime shale patch nearby.

"That's really the key," Phillips 66 President Tim Taylor told Reuters. "With Cushing, you can get a blended barrel that hits the spec, but it's not as consistent as you'd like."

Others are also seeking to cut out the middleman where possible, delving into an industry once dominated by independent local players and stepping up pressure on bigger midstream transport and logistics firms to meet their needs.

In December, Delek Logistics Partners LP paid $11.5 million to buy 120 trucks and 200 trailers used to haul crude and asphalt, mostly for its parent firm's East Texas and Arkansas refineries.

CVR Refining LP, with two refineries within 120 miles (190 km) of Cushing, in Oklahoma and Kansas, has increased the amount of crude it gathers directly, by pipeline or truck, by more than a fifth in the past two years. In January it gathered 63,500 bpd, or more than a third of its total crude slate.

IT'S THE BLENDS, DUMBBELL

Shipping crude by truck, though costly, has become a fast-growing necessity in places like the Eagle Ford in Texas and Permian Basin, newly productive shale oil patches ill-served by small local pipeline networks known as gathering systems.

As a result, truck deliveries direct to U.S refiners have surged to nearly 400,000 bpd nationwide in 2013, doubling since 2010, government data show. Midstream companies including Blueknight Energy Partners and some private equity firms, including Riverstone Holdings, have also invested.

For refiners, the investment is less about profitable logistics than quality control.

Many executives say that the crude oil blends being created in Cushing are often substandard approximations of West Texas Intermediate (WTI), the longstanding U.S. benchmark familiar to, and favored by, many refiners in the region.

Typical light-sweet WTI crude has an API gravity of about 38 to 40. Condensate, or super-light crude that is abundant in most U.S. shale patches, ranges from 45 to 60 or higher. Western Canadian Select, itself a blend, is about 20.

While the blends of these crudes may technically meet the API gravity ceiling of 42 at Cushing, industry players say the mixes can be inconsistent in makeup and generate less income because the most desirable stuff is often missing.

The blends tend to produce a higher proportion of fuel at two ends of the spectrum: light ends like gasoline, demand for which has dimmed in recent years, and lower-value heavy products like fuel oil and asphalt. What's missing are middle distillates like diesel, where growing demand and profitability lies.

"You end up with a dumbbell-like material rich in front and back ends, neither of which refineries find most profitable," said Dennis Sutton, a former chemist and retired crude quality expert with Marathon Petroleum Corp who now heads the Crude Oil Quality Association.

The trend extends beyond Cushing. With three refineries relatively close to the Utica shale in Ohio, Marathon Petroleum has added truck and barge offloading to handle crude and super-light condensate as well as fuels, increasing its tanker truck fleet 16 percent from a year ago to 170, according to company presentations. The trucks can be used for crude or fuel.

"Every place we can, we're procuring our own crude," Chief Executive Gary Heminger said in an interview.

Western Refining Inc will use trucks run by its logistics unit to haul more than 50,000 bpd to its plants in New Mexico and West Texas this year, up 39 percent from 2014, according to its annual regulatory filing.

PIPES IN THE MIDDLE

Oil pipeline operators, who risk losing customers as more refiners source their own supply, are also responding.

At least five new pipelines - including Tallgrass Energy Partners' Colorado-to-Cushing Pony Express line, which started up in November - will ship crudes in separate batches, rather than throwing them together in a single stream, as has been common for major crude pipelines to Cushing or Houston.

Traditional "common stream" lines, where super-light crudes mingle with WTI-like oil, also are adapting.

Magellan Midstream Partners' Longhorn pipeline, which moves West Texas Permian Basin crude to Houston, raised its gravity cap last year to 44 from 42. And it recently started up its joint-venture BridgeTex pipeline with a cap of 44.

Common-stream lines could theoretically keep raising those caps as more lights enter the flow, but refiners would demand price breaks, said Brian Melton of Blueknight, which is part-owned by global oil trading group Vitol.

"If I can run a 44-45 grade and source it at enough of a discount that it makes sense to run it versus a 41 or 42 even if I give up yields, that's the tradeoff," he said.

(Reporting By Kristen Hays; Editing by Terry Wade, Jonathan Leff and Jonathan Oatis)