(MENAFN - Arab News) For years inland North American oil producers have yearned for easy access to the huge US Gulf Coast market to escape the crushing competition in the Midwest that kept crude prices well below world levels.
Yet with nearly unfettered access to the giant refineries of Texas and Louisiana now at hand this dream is quickly turning to dust.
Instead of elbowing aside a few flabby foreign competitors and settling into a comfortable, premium-priced market niche, North American oil producers face a punishing struggle for market share.
Crude oil from the Eagle Ford shale in Texas, Canada's oil sands, North Dakota's Bakken Shale and a revived Permian Basin is set to arrive in force in Texas beginning in early 2013.
More than 600,000 barrels per day in new pipeline capacity from the Midwest and Permian Basin into Texas Gulf Coast markets is due to come into service in the first months of 2013.
Even more capacity from the Eagle Ford Shale is also set to come into service.
Some observers have made a lot noise about the fact that much of this oil will be the "wrong" kind of crude: too light and too sweet for Texas plants set up for processing heavy sour oil.
But refineries can be remarkably omnivorous, if the price is right. Profits are all that matter. Running light sweet crude might yield a strange assortment of products but if the numbers add up a heavy sour plant will do it.
However those numbers can often only add up if the light crude is very cheap. If not, a refinery may stay with seemingly "overpriced" heavier crude due to more profitable slate of products it yields.
This fact alone is likely enough to keep Gulf Coast light crude prices depressed next year, including marker grades like Light Louisiana Sweet.
For inland oil producers that means even more pain as they must absorb the high cost of shipping into what is now becoming a hyper-competitive market.
The emerging ugly picture on the Gulf Coast is forcing many inland producers to rethink their strategies.
Putting North Dakota crude on trains to the Gulf Coast was a great idea while it worked but as the Gulf Coast market succumbs to the pressures that have flattened crude prices inland, railing oil to St. James Louisiana will be an increasingly painful choice.
Exporting crude oil to Eastern Canada on ships may even become possible.
Not surprisingly, markets on the US and Canadian East and West Coasts where competition from pipelines is greatly reduced has drawn the attention of rail players.
And Canadian producers, who complacently assumed Gulf Coast access would solve all their pricing woes, are now scrambling to find alternative outlets for their oil.
As in natural gas, Alberta producers of crude oil are staring down the grim prospect of having to ever more deeply discount oil to get it to market.
But still, foreign barrels are likely to be the first pushed out of the Gulf Coast market. Start with the 150,000 bpd of light, sweet crude processed in the Houston area as of August.
Algerian, Libyan and Nigerian crudes will be increasingly unlikely to make it to the southern US next year.
Same for the few North Sea cargoes that still occasionally land on the Gulf Coast.
Other large supply streams, notably Mexico's roughly 200,000 bpd of light crude exports to Texas refineries that it does not control, are also likely to be threatened.
Faced with a surfeit of choice, refineries will be able to pick and choose based on price. Despite the rise of outlets on the East and West Coasts, Gulf Coast refiners will have the luxury of rejecting any domestic crude that gets too expensive.
And making matters worse, survivors of the last Gulf Coast market share war that broke out 15 years ago are still occupying some old positions.
Roughly a quarter of the more than 8 million barrels per day of refining capacity in Texas and Louisiana is controlled by the national oil companies of Venezuela, Saudi Arabia and Mexico.
Gaining access to these plants will turn on the willingness of these countries to cede market share in the US.
But the problem of simply diversifying the customer base is that unless alternative markets are big enough to take a major share of output, producers are unlikely to gain much, if any pricing power.
A market characterized by a fight for market share naturally favors vertically integrated players. Some Canadian oil sands producers have already tried this approach in the Midwest.
Now light sweet crude oil producers may well see the same logic. Why battle competitors for space in the market if you can buy yourself a permanent home?
The renewed attractiveness of integration comes just as many integrated players have broken themselves up at the behest of Wall Street in the name of "strategic focus."
A full rollback of integration is unlikely. But next year may see a surge in alliances between newly strengthened downstream players and weak inland oil producers.
- Robert Campbell is a Reuters market analyst. The views expressed are his own.