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Exclusive: U.S. refiner PBF switches up Saudi crude routes

By Jonathan Leff

NEW YORK (Reuters) - Thomas O'Malley, the U.S. refinery magnate with a history of squeezing profits from forsaken facilities, is using a rare shipping maneuver to bolster margins, bringing imported Saudi crude from the Gulf of Mexico to his East Coast plants.

A Reuters data analysis shows that in the past five months at least 11 oil tankers have loaded -- or "lightered" -- crude off of super-tankers parked off the Gulf Coast, outside of U.S. waters, and delivered it to PBF Energy's Delaware City and Paulsboro, New Jersey, refineries.

For O'Malley, the aim is to cut costs on PBF's growing imports of Saudi crude, which in the past was shipped across the Atlantic from a pipeline terminal in Egypt.

But the moves may also embolden opponents of the Jones Act, a decades-old law that bars foreign-built, -owned or -flagged ships from carrying goods between U.S. ports.

Although PBF's shipments are not subject to the Jones Act because they involve transferring foreign oil from one ship to another outside of U.S. waters, many other companies would like to run a similar route in order to deliver a swelling surplus of discounted domestic crude from Texas to the East Coast.

A growing number of critics say the decades-old Jones Act is antiquated, and the law was briefly suspended recently to alleviate gasoline shortages after Superstorm Sandy devastated the U.S. East Coast. But it is still on the books, and has support from U.S. shippers and other interest groups.

Because most U.S. ports can't accommodate the biggest oceangoing supertankers, lightering crude in the Gulf is an everyday activity, but the oil is usually bound only for local Gulf Coast refineries, not those further afield.

Only around 20 such crude shipments were sent to East Coast ports between 2004 and this year, according to the analysis of data from shipping intelligence firm PIERS, which aggregates cargo manifest details from customs data.

Traffic on the route has surged since July, with PBF importing more than 5.5 million barrels, all of it on foreign-flagged vessels, the data show.

The switch also coincides with a pick-up in PBF's consumption of Saudi crude, which has doubled at one plant.

A PBF spokesman declined to comment for this story, citing a "quiet period" ahead of the company's initial public offering. He also said the company considers logistics and operations information to be "business confidential".

JONES ACT ATTENTION

Other companies are angling to ship a surge of light, sweet crude oil produced from the Permian Basin and the Eagle Ford shale oil fields in Texas to thirsty East Coast refiners. But they are faced with a limited supply of U.S.-flagged vessels.

Only one Jones Act-compliant medium-range crude oil tanker is currently available in the market, according to MJLF & Associates, a leading broker that deals in U.S.-flagged tankers. Most others are locked up in long-term charters.

But tanker supply isn't a problem for PBF, which can take advantage of global freight rates that are near their lowest in a decade since the lightering occurs in international waters.

"This just shows how antiquated the Jones Act is," says Ed Morse, global head of commodities research at Citigroup and a former energy expert at the State Department.

Although the act has long been considered untouchable due to its strong backing by U.S. shipbuilders, owners and unions, President Barack Obama has twice in the past two years granted waivers to ease the flow of fuel, most recently after Sandy.

Morse noted these waivers had caused only a muted outcry among the U.S. shipping industry, partly because the surge in shale output and rapid growth in U.S. gasoline and diesel exports from the Gulf is making the Jones Act harder to defend.

Some now see the Jones Act as an "impediment to lower crude oil and fuel costs for U.S. consumers," he said.

SHALE SHIFTER

O'Malley returned to the U.S. refining industry two years ago, with plans to revive his refineries on the East Coast, a region some big energy companies had written due to its outdated plants dependent upon costly European crude.

Part of his latest plan to boost margins is to rejig PBF's crude supply arrangements at the 180,000 bpd Paulsboro refinery, bringing in more domestic and Canadian crude by rail and terminating a supply agreement with Statoil next March, according to an SEC filing last month.

In the filing, PBF also said it has been buying "up to approximately 100,000 bpd" of Saudi crude for Paulsboro alone, nearly twice what it was buying a year ago, according to government data. Delaware City, once owned by the Saudi state oil firm, is also consuming more of the kingdom's crude. (Graphic on Saudi imports: http://link.reuters.com/fyf54t )

Before this summer, PBF had been loading two or three Saudi cargoes a month from Egypt, the end point of the Sumed pipeline used by Gulf producers to bypass the Suez Canal. But those shipments now appear to have diminished. No such cargoes appear in the PIERS data for September and October.

By loading its crude in the Gulf of Mexico instead, PBF avoids trans-Atlantic freight rates, while state oil firm Saudi Aramco avoids paying pipeline tariffs. But it is a longer overall journey as supertankers from Saudi Arabia must round the Cape of Africa to reach the United States.

Because the new route is so rare, freight brokers said it was all but impossible to calculate how it may cut costs. (Map of new ship flows: http://link.reuters.com/dyg54t )

AET, a major global oil freight firm owned by Malaysia's state-run shipping giant MISC , has hauled more than half of the 500,000-barrel cargoes, according to the PIERS data.

Asked about the shipments, an AET spokesman said the company is a "leading provider" of lightering services in the Gulf with 30 Aframax tankers and a fleet of support vessels. AET has not detected a "discernible change" to its operating pattern in recent months, the spokesman said.

NO STRANGER TO DELAWARE

PBF is not the first refiner to ship lightered crude from the Gulf Coast up the East Coast.

In 2009 and 2010, Royal Dutch Shell moved several cargoes of Nigerian and Iraqi crude from the Gulf Lightering Zone to Portland, from where it could be pumped to Shell's 130,000 refinery in Montreal. Shell announced the closure of the over 75-year-old plant in early June 2010; the last such shipment from the Gulf of Mexico to Maine landed days later.

Shell did not respond to questions about the shipments.

Saudi crude has long been a staple at Delaware City, which was owned by the kingdom's U.S. joint-venture refining arm from 1989 until 2004, when O'Malley's Premcor bought it. Valero bought Premcor a year later. PBF bought it back in 2010.

But the plant rarely took Saudi crude since PBF restarted it just over a year ago, buying only 1.6 million barrels in October 2011 prior to July's batch, according to government data.

(Reporting By Jonathan Leff; data analysis by Siddharth Shenoy and Cezary Podkul; Editing by David Gregorio)

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