In its fuel-products
segment, Calumet Specialty Products Partners processes crude oil into gasoline,
diesel, jet fuel, asphalt, and other by-products. With the advantages of
growing domestic crude oil production in the Bakken and Eagle Ford formations,
this independent producer is enjoying low-cost crude and a higher crack spread,
resulting in a better refining margin. Moreover, strong U.S. demand for
gasoline in November and December 2013 and the increased consumption of
distillate diesel are leading refiners in the U.S. Gulf coast, including
Calumet, to strengthen their fuel-products segment.
Calumet’s production assets
are positioned near Bakken and Eagle Ford, which has helped the company utilize
the production growth in these two fields. In Bakken, crude-oil production is
expected to surpass December’s production of 1 million barrels per day (mbpd)
with 1.3 mbpd by 2015. In Eagle Ford, total crude-oil production is expected to
increase to 1.5 mbpd by the end of 2015 from 1.2 mbpd in December 2013.
To access the flourishing
Bakken crude for its refining operation in the safest way, Calumet recently
proposed building a dock on Lake Superior. The company will spend $20 million
on the dock and ease the process of shipment of crude oil from Bakken shale as
well as from Western Canada. This dock will be adjacent to its Superior
refinery, which has total refining capacity of 45,000 barrels per day (bpd) and
processes mainly Canadian and Bakken crude. Apart from this, the dock will also
help the company move crude oil to the company’s other refineries. The company
expects that the dock-building project will be completed and fully operational
in 2015 which will ease shipping activity.
Apart from Bakken and
Western Canada crude, Calumet also signed a definitive agreement with TexStar
Midstream Logistic LP to construct and operate a pipeline in order to carry
Eagle Ford crude to its San Antonio refinery in Texas. This refinery processes
Eagle Ford crude into fuel and specialty products. Maximum pipeline capacity for
shipping crude oil is expected to be around 30,000 bpd.
In this 15-year agreement,
TexStar with Karnes North Pipeline system, will ship Eagle Ford crude to the
San Antonio refinery through Calumet’s Elmendorf Terminal in Texas. This
terminal is the key supply hub for the company’s San Antonio refinery.
This refinery is expected to
receive at least 10,000 bpd by the fourth quarter of 2014 from the TexStar
pipeline. The amount of total crude shipment through this pipeline is expected
to exceed the present level of 10,000 barrels per day and meet the maximum
capacity of 30,000 barrels per day. It will also help the company reduce
transportation costs, which was previously dependent on trucks.
Widened crack spread helps
refine margin
Along with production growth,
Calumet also benefits from the widened crack spread of Bakken and Eagle Ford
crude oil. The crack spread plays a major role in a refinery’s profitability.
Crack spread is the difference between crude and the wholesale
petroleum-product prices. The widened spread between the prices could generate
more refining profits. U.S. Gulf Coast refiners can buy cheaper crude due to
the domestic crude production glut and sell the refined products at a higher
price internationally. As a result, the spread continues to grow which improve
the refining margin.
Almost every fuel product
refinery plant of Calumet uses Bakken crude, which has traded at around $10
lower per barrel than West Texas Intermediate (WTI) during December. Apart from
Bakken and Eagle Ford crude, the company uses Canadian heavy and sour crude,
which is trading $38 less per barrel than WTI, for its fuel-refining operation
in the Superior and Great Falls refineries. As a result, the company achieved a
refining margin of $16 during its fourth quarter. With the widened spread,
Calumet will improve its margin in the coming quarters despite comparatively
weaker income and distribution for the quarter.
EPA downward mandate reduces
expenses
Calumet is also expected to
see a better refining margin in its fuel-product segment since the EPA has
reduced the amount of bio-fuel to be mixed in the nation’s fuel supply. The
drawbacks of using Ethanol in shipping forced the EPA to reduce the amount from
16.55 billion gallons in 2013 to 15.21 billion gallons in 2014. This reduction
affected the Renewable Identification Number (RIN) cost. Calumet had a higher
RIN cost for corn ethanol in the first three quarters last year, but the cost
came down in the fourth quarter to average $0.30 per RIN and is expected to be
the same for all of 2014 due to the EPA’s announcement.
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