In full flow: pipeline additive sales boom amid oil bottlenecks
24/05/2018 06:00
By Julie Gordon and Rod Nickel
HOUSTON/CALGARY, Alberta, May 24 (Reuters) - Pipeline
bottlenecks have vexed North American oil producers this year,
but for companies making a little-known additive called
drag-reducing agent (DRA), they have provided a veritable
windfall.
DRA is injected into pipelines to reduce the contact between
the oil and the wall of the pipe, allowing more crude to flow
through. It is a tiny but booming business, accounting for about
$500 million in global sales - half of that in the United States
- but is growing about 8 percent annually, said Brian Watt,
senior vice president at specialty chemicals producer Innospec
Inc IOSP.O , based in Englewood, Colorado.
Pipeline companies are increasing DRA usage because of
bottlenecks in the key North American producing regions of
Texas's Permian Basin and Western Canada. Those crude grades
have traded at greater-than-usual discounts to benchmark U.S.
futures CLc1 this year because of inadequate pipeline space.
Planned pipelines in the Permian will not largely start
coming online until late this year, while new Canadian pipeline
capacity faces scrutiny by politicians, activists and
regulators.
"Anything that cost-effectively allows you to increase
capacity or reduce the energy pumping those lines is going to
look like a good investment," Watt said.
Adding DRA, which sells for $15 to $25 per U.S. gallon,
allows pipeline operators to reduce pump pressure.
"We’re using a lot more DRA in the system," said Guy Jarvis,
executive vice-president of liquids at Canada's biggest pipeline
company Enbridge Inc ENB.TO , because it can "provide a bit of
a boost" to flow, as well as reduce power bills.
TransCanada Corp TRP.TO used DRA to maintain flows on its
Keystone pipeline despite pressure restrictions after a leak
late in November in South Dakota, industry sources told Reuters.
One month after the leak, throughput on Keystone was at
583,000 barrels per day, just 2 percent below nameplate capacity
despite the 20 percent pressure restriction, according to
previously unreported data from the National Energy Board,
Canada's energy regulator.
In the first quarter of 2018, average flow was above
capacity even though restrictions were not lifted until May.
TransCanada did not confirm the use of DRA in the Keystone line,
citing commercial sensitivity.
INSANE DEMAND
DRA has been around since the 1970s, but pipeline operators
kept its use quiet, believing it gave them a competitive
advantage. Even now, few companies disclose how much DRA they
produce.
"Because the demand picture is shifting pretty rapidly,
matching up supply and demand is critical to maintaining a
profitable business," said Greg Jones, head of downstream
products at General Electric unit Baker Hughes BHGE.K , which
is expanding output in Oklahoma by an undisclosed amount.
"Everybody's a bit cautious about not tipping their hand."
Innospec said on Monday that it is building a new DRA
production plant in Texas, while LiquidPower Specialty Products
Inc, a Berkshire Hathaway BRKa.N unit, doubled manufacturing
capacity late last year.
Private equity has also noticed. Houston-based CSL Capital
Management funded start-up Optum Energy Solutions' new 60-acre
(24-hectare) DRA plant in Oklahoma.
"We saw an opportunity for steady and growing demand for
DRAs for the next several years," said CSL founding partner
Charlie Leykum, noting it can help maintain volumes on aging
pipelines where pressure has to be carefully managed. He
declined to disclose the size of his firm's investment.
Recently, companies have started including DRA into pipeline
designs to reduce capital costs by using smaller pipe, said
Marina Kaplan, LiquidPower's director of strategy, marketing and
business development.
Politically volatile regions also generate high demand as
companies have to contend with damaged pipelines, Jones said.
Older lines in Iran use DRA to increase or maintain output, said
Patrick Bayat, chief executive of Tehran-based DRA producer
Partow Ideh Pars Co, in an email.
NuGenTech Chief Executive Donato Polignone said the
Emeryville, California-based company sells DRA to Kuwait Oil
Company.
"I've seen insane demand for this for the last three years."
($1 = 1.2862 Canadian dollars)
(Reporting by Julie Gordon in Houston and Rod Nickel in
Calgary, Alberta
Editing by Marguerita Choy)
((julie.gordon@thomsonreuters.com; 778-374-3856; 604-396-7906;
Reuters Messaging: julie.gordon.thomsonreuters.com@reuters.net))