The first deliveries of domestic crude oil production have been made to major refining markets on the Texas Gulf Coast via the recently completed Cameron Highway Oil Pipeline System. This 390-mile pipeline is the longest offshore oil pipeline in the U.S. and is the first offshore link between the deepwater developments offshore Louisiana and the Texas coast.
Cameron Highway, operated by Enterprise, is a $500 million joint venture between Enterprise and Valero. The pipeline was built to move crude oil production from the large deepwater developments in the Central Gulf of Mexico, and future discoveries in the Western Gulf, to the United States' largest refining complex on the Texas Gulf Coast, including major markets in Port Arthur and Texas City, Texas. The pipeline has the capacity to deliver up to 600,000 barrels of oil per day (BPD), and provides a lower cost alternative than pipelines onshore in Louisiana.
Cameron Highway commenced service earlier this year and producers in the Southern Green Canyon area of the Gulf of Mexico are in the initial stage of completing pre-drilled wells from the Mad Dog and Holstein fields. The first five wells have been connected and the pipeline is currently delivering approximately 80,000 BPD of domestic crude oil production to Texas. Production is expected to ramp up throughout 2005 and 2006 as additional wells are completed and additional fields are connected to the pipeline.
"We are pleased to announce Cameron Highway's first deliveries of crude oil to the Texas Gulf Coast," said Robert G. Phillips of Enterprise. "This pipeline creates value for both the producers in the deepwater who can deliver their production to larger and higher valued markets and to the refining industry seeking new sources of supply. The pipeline's wide loop westward across the Gulf of Mexico to the refining markets in Texas should make Cameron Highway the crude oil pipeline of choice for new deepwater developments in this area and highlights Enterprise's commitment to building new energy infrastructure to meet America's growing energy requirements. Additionally, the Cameron Highway project is an example of the broad set of midstream organic growth projects that will drive future value for our investors."
Cameron Highway also represents the shift toward an increasing need to bring a medium-sour crude oil mix to the Texas Gulf Coast refining market. Although sweet, light crude oils are easier to refine and represent an estimated one-third of world refinery consumption, the long history of higher demand for these crude oils has depleted their availability. They now constitute only about one-fifth of remaining world oil reserves.
While many refiners, to varying extents, have prepared and adapted to meet this shift, Valero Energy Corporation has strongly invested in a complex refining system that processes heavier, sour crude feedstocks and successfully taken advantage of widening price spreads.
Pipeline access to this crude oil through the Cameron Highway route is a great fit for Valero, which has seven refineries tied to the company's coastal distribution system anchored in Texas. Although each refinery has a different configuration of assets that run different specifications of crude, Valero optimizes operations by running the network as if it were one big refinery, and has strongly invested in a complex refining system that processes these heavier, sour crude oils - which currently make up about 70 percent of Valero's crude slate.
"This is a leading reason why Valero was eager to become a 50-percent partner in the Cameron Highway project," said Bill Greehey, Valero's Chairman of the Board and Chief Executive Officer. "This project provides an opportunity for Valero to secure a stable source of high-quality crude oil at a savings when compared to foreign-sourced alternatives. As all of these new reserves in the deepwater Gulf of Mexico are developed, they will be very valuable to a company like ours, which processes heavier, sour crude feedstocks. We are running Cameron Highway crude oil at one of our Gulf Coast refineries today. So, not only is this a very strategic investment for the company, but our equity participation in this project is also expected to yield a steady flow of income to Valero and its shareholders," he said.
Cameron Highway is supported by life-of-lease dedications with BP, BHP Billiton and Unocal to move their production from the Holstein, Mad Dog and Atlantis fields, and with Kerr McGee to move their production from the Constitution and Ticonderoga fields. Additionally, Cameron Highway has contracted with Shell under a term agreement to move its 50 percent share of production from the Holstein field.
Throughout 2005 and 2006, the pipeline anticipates increased deliveries from the Holstein and Mad Dog fields located in the Southern Green Canyon area of the deepwater Gulf of Mexico, with additional crude oil coming from the initial start up of production from the Atlantis, Constitution and Ticonderoga fields in 2006.