“I think, eventually, the pipeline will be approved.”

The blowout WTI/Brent spread of 2011 has been evaporating—falling to $8 at year-end and at about $11 today—as global and North American oil-price dynamics continue to erupt. Iran is talking about closing the Strait of Hormuz, the U.S. Senate has put the Keystone XL project back on Obama’s “to answer” list and the reversal of the Seaway pipeline is under way.

What gives? We caught up with Andy Lipow, founder and president of Houston-based Lipow Oil Associates LLC, for some expert insight. Lipow has been in the hydrocarbon trading and refining business for more than 30 years, including with Europe-based powerhouse Vitol Group and with Amoco Corp., which is now part of BP Plc.

Oil and Gas Investor: Will the WTI/Brent spread evaporate?

Lipow: Well it’s narrowing and it will continue to narrow, depending on how much take-away capacity comes online out of Cushing over the next couple of years. My expectation is that we’re going to see some periods of narrowing followed by some periods of widening followed by periods of narrowing again as there are a lot of changes happening at different times in supply, demand and infrastructure.

Oil and Gas Investor: What created such a vast spread in the first place?

Lipow: It’s a reflection of a number of things. This past year, we had the conflict in Libya, which removed 1.6 million daily barrels light, sweet crude from the market. That was in conjunction with production problems in the North Sea as well as Kazakhstan and Azerbaijan. Meanwhile, here in North America, we have increasing production of crude oil from both Canada and North Dakota that is trying to make its way to refineries on the Gulf Coast. Well, there is currently no pipeline that goes directly from Cushing (Oklahoma) to the Gulf Coast, so we had to look for alternative routes of transportation, mainly rail and barges.

Oil and Gas Investor: It looked like we ended up with “stranded oil” right here in North America.

Lipow: In this case, I think of stranded oil is sort of like being in the middle of the desert with no means to get out. The oil is waiting for a ride. In North America, the oil already being produced is all moving to market. However, in many cases, it’s not coming out of the ground because the producers are waiting for logistics, meaning truck or rail or transloading facilities to come online. In that sense, you could say production is held back by the lack of take-away capacity. But there is certainly a market for the oil.

Oil and Gas Investor: So, there is yet more North American oil supply that is being held back, waiting for take-away?

Lipow: Well, you’re seeing production continue to increase and as infrastructure comes in, yes, oil production will increase.

Oil and Gas Investor: What encouraged ConocoPhillips to sell its half-interest in Seaway this fall?

Lipow: I think ConocoPhillips saw that Enbridge (Inc.) and Enterprise (Products Partners LP) was involved in a number of projects—Monarch, Double E, Wrangler—that were to bring more oil to the Gulf Coast. ConocoPhillips probably thought at least one of these projects would happen and, when it did, it would decrease the value of Seaway to a potential buyer.

Oil and Gas Investor: Without the reversal of Seaway, ConocoPhillips’ Midcontinent refineries were in better fiscal shape for using WTI-priced crude than the Gulf Coast refineries that use Brent-priced crude?

Lipow: They had a raw-material advantage versus Gulf Coast refiners that are buying crudes linked to Brent.

Oil and Gas Investor: The Keystone XL amendment to the payroll-tax-reduction bill that cleared Congress just before Christmas requires Obama answer on Keystone within 60 days, which would be by late February. Do you think Obama will actually approve it then?

Lipow: I think, eventually, the pipeline will be approved. Of course, there are a lot of political issues around Keystone—from the route to the environmental groups that are against anything that would encourage oil-sands production. But now he has another issue facing him and that is the rhetoric in the Middle East.

Oil and Gas Investor: By Iran?

Lipow: Yes, the threat of the closure of the Strait of Hormuz that would affect one sixth of the world’s oil supply.

Oil and Gas Investor: Anything a WTI/Brent-spread enthusiast should know?

Lipow: The Brent/WTI movement is a result of increases in production and a logistics and distribution system that has been inadequate to move onshore North American crude oil to the refining centers on the Gulf Coast. As that distribution system improves, we’re going to see the Brent/WTI spread change.

Oil and Gas Investor: Is even more midstream capacity or direction of take-away needed based on where production is coming online in North America?

Lipow: If you look at over the next five to 10 years, as oil production increases, we will need more infrastructure.

–Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com. Contact Nissa at ndarbonne@hartenergy.com.