North Dakota Bakken Crude Oil

Cross posted from the St. John unit oil train thread in the PAR forum:

gokeefe wrote:On an oil related note benchmark U.S. light crude (CLN2) is testing the technically significant $90.00 mark in trading today.

Since declining from above $100 barrel the price appears to have achieved technical support at $90 +/-.

Estimates of economic costs for shale oil extraction vary substantially and I have yet to see reliable figures. I have also seen cost estimates of the price of transportation per barrel in the $15/barrel range for rail and $6-$7/barrel for pipeline transit. Some of this differential has been used to explain the price spread between Brent crude, West Texas Intermediate (~-$15 relative to Brent) and North Dakota Light Sweet (as much as ~-$25 relative to Brent). We will know what the real economic price of shale oil is when/if the wells get shutdown, as of right now there's no sign of that yet whatsoever despite a very clear "bearish" picture for crude prices in the medium term.

On another related note the recently released monthly report for the Oil and Gas Division of the North Dakota Department of Mineral Resources indicates a new all time record high active rig count of 214 and a new all time high of 575,490 barrels per day of production in March. We are now in May and it seems likely ND is probably above 600,000 barrels per day at this point.

This article from last week on CNBC probably gives as good a description of the displacement on the global oil markets caused by increases in U.S. oil production of any I have read yet to date.

LONDON, May 22 (Reuters) - Europe is facing a glut of high quality crude oil grades, only a year after war in Libya created a serious shortage, as the continent's demand falls and the United States cuts imports due to greater availability of domestic supply.

This has led to a steep weakening in values for many high quality sweet and low-sulphur grades in a rare market development potentially suggesting oil futures prices have scope to correct yet lower in a very oversupplied market.

I am curious to see whether or not continued declines in the price of oil affect production in North Dakota and hence the potential for development of this new line of business for PAR.

The Grand Forks Herald has this article today.

The rig count in North Dakota hit a new all time high today of 218, up 4 rigs from just four days ago. North Dakota crude is currently priced at $75/barrel which is about $31/barrel cheaper than the "Brent" priced crude typically refined on the East Coast.

A record 218 rigs were drilling new wells for crude oil Tuesday in North Dakota’s Oil Patch, according to the state’s Department of Mineral Resources.

The number has been rising steadily the past two weeks, after a spell since September when it ranged mostly from 205 to 210.

To comment on past observations...

The US is NOT going to become a net crude exporter. Not even close. We currently import nearly half of our consumption. Net natural gas exporter? Maybe. But not by much.

The primary reason for the brent-WTI spread is logistics challenges associated with new US and Canada production. Spreads create profit-driven initiatives which eventually narrow the spreads. Rail is (rightly) making hay while the sun shines. Pipelines, they're a-comin'.

To continue at this topic where mature minds are meeting to express their thoughts in a respectful manner.

While I sincerely hope that Mr. O'Keefe's optimism regarding Bakken Crude, even considering Mr. Cowford's well-placed caveat, will offset the strong possibility of traffic losses from what have been considered "safe" sources, notably coal but also diversions to the favorable export/import line hauls presently enjoyed as a result of PANAMAX, I remain concerned that some Middle East sovereignty, especially one with "nothing to lose', will attempt to flood the market and render extraction of Bakken economically unfeasible. This article appearing in Today's New York Times (front page; "above the fold") would suggest that the Republic of Iraq is on just such a course:

http://www.nytimes.com/2012/06/03/world ... rkets.html

Finally, and again referencing Mr. Cowford's caveat, I can only hope that the railroads are prepared to present to the petroleum industry a long term plan to continue providing service so long as there is product in the Bakken fields that can be economically extracted. Let us further hope that the industry is not as short sighted as they reportedly were during the 60's when the Interstate Highways were being built. Articles in TRAINS during that period suggested they were like the GEICO pig saying "Wheeeee....look at all this concrete and other construction material we now have to handle". Apparently they were unaware orsimply too blind to see they were digging their own grave that took their successors many a year from which to "exhume" the industry.

"Apparently they were unaware orsimply too blind to see they were digging their own grave that took their successors many a year from which to "exhume" the industry."

Mr Norman, you bring up an interesting observation. If I read your posted correctly, you're fearing that the railroads may become a little too enthusiastic in helping their executioners load their rifles. This may be evident in rail-based crude transport pricing, as well as in assisting in the transport of materials that will be used to displace rail (transmission pipe, etc).

I believe the railroads know the score, so to speak. It's only in unusual circumstances that rail can effectively compete against pipeline. Inevitably, a transmission network will be developed in such places as the Bakken, and rail's participation will wane. I'd be surprised if rail pricing strategy would be able to sway conversion decisions in most cases. From what I understand, the ROIs for the loadout terminals in ND were calculated using a very short projected lifespan. It would be interesting to know over what term refineries are calculating their ROIs to justify CapX for rail unloading facilities.

Similarly, I think you'd agree that it's wise for the railroads to participate to the greatest extent possible with regard to transporting in pipeline construction materials. "If you can't beat 'em, join 'em" comes to mind... autos, intermodal, etc... The automobile certainly contributed to decimating passenger rail traffic, and it's ironic that the rail industry was instrumental in auto industry growth. Today's rail industry is a lot happier carrying vehicles and parts than people.

This article carried by Reuters indicates that pipeline expansion may not at all be widespread to the shale fields, and the use of rail cars to move oil may continue for an extended period of time.

Many analysts say rail will be a bigger part of the oil delivery picture for years because shale wells - often scattered, small and of uncertain lifespan - won't justify pipeline construction.

"We think the E&P (exploration and production) side will develop faster than infrastructure to take it away over the next five to 10 years, so we think that will be a good investment," Garland said. "It's a really quick payback on that."

That's the first time I've seen this analysis, previously most articles seemed to indicate that pipeline capacity would be expanding substantially over the next few years. I think there are some serious concerns over the exact lifespan of the shale oil wells that are likely holding back major expansion by pipeline operators. In that scenario rail is clearly the long term winner.

The contract price for Bakken Oil is getting down to near the production cost. I saw a price of $65 per bbl quoted last week. With demand drifting lower I think we are below production costs for Alberta Tar-Sands Oil, which will remove most or all of it from the market. This will quickly cool plans for pipeline construction as the Oil Producers will be unwilling or unable to commit to contracts to have their Oil transported. In the mean time you can already see the railroads looking to the East and West Coasts rather than the Gulf as destinations for their Crude Oil trains. Tesoro Refining has leaked that they are considering shipping Bakken Crude to their Kenai, Alaska refinery to replace the heavy North Slope Crude. The Kenai refinery was designed to process light Cook Inlet (Alaska) Crude, but production has fallen off to the point that heavy North Slope Crude has to be added to meet the refinery's needs. Tesoro has built unloading racks at their Anacortes, WA refinery large enough to handle Crude for both refineries. Rail hauled Crude can chase the best price for the producers, while pipelines cannot to the same.

I think it is important to understand the distinction between types of pipelines. It seems to me the discussion here centers on transmission lines, such as the Keystone pipeline or the Trans-Alaska pipeline. There is another type of pipeline system being constructed in the Bakken shale, just as in other shale formations: gathering pipelines. These are networks of hundreds of miles of pipelines that support the flow of petroleum products from the wellhead to the distribution centers. Even when a transmission line is not required, there is still a lot of pipeline construction to be completed to make a shale formation produce economically.

From my vantage point as a switchman, and as a former gathering system designer, much of the pipeline and drill pipe I see is the smaller scale gathering system material. It takes years to build out a shale formation with all the gathering pipelines that must be installed. As the production capability of each well becomes known, additional pipelines may be constructed and the initial smaller diameter lines are put to use for other purposes. In addition to the pipelines, there are central gathering facilities, processing facilities, pump stations, etc. that must be constructed as the formation is developed.

Suffice it to say that there is a great deal of pipeline construction opportunity in the Bakken and other shale formations that does not involve the railroad reducing its role in the delivery of petroleum products.

I was starting to wonder as well if the drop in crude oil prices for Brent and WTI would affect Bakken Crude Oil prices as well:

Here is some interesting information:

First from "PN Bakken" or Petroleum News: Bakken is this article on production costs. They give a range that is much lower than what I had been thinking:

Bakken producers, depending on location and other factors, must receive from $40 to as much as $60 per barrel of oil to stay in business, according to industry representatives.

Interestingly enough, in the same article, the rail transportation aspect of the pricing dynamic is also discussed:

During the so-called oil price blowout earlier this year, thought to be spurred by President Obama’s decision not to permit the U.S. portion of the Canadian Keystone pipeline, Bakken oil fell in to the $70-$80 per barrel range and came dangerously close to the upper end of the $40-$60 price threshold thought to be required to do business in the Bakken play.

“The main thing for us is that if you look at what’s happening in the world, you’ve got Brent crude about $20 above WTI,” Zimmerman said. “And you’ve got Bakken crude $25-to-$30 below that. So, you’ve got, say, a $40 spread in there and it cost me $10 to get the oil down (by rail) to St. James” refinery in Louisiana.

He added: “We’re confident that over time this might be a short-term hit. The infrastructure’s going to come; the pipelines are going to get built. You’ve seen how rail has been a bit of a savior and in a big way; because it is the outlet we would not have had if we just had a pipeline.”

So it would appear for now that although the price is low there are probably still decent margins, for now, to keep production in the Bakken running.

Finally I found a data point for Bakken oil coming off the Enbridge pipeline at Clearbrook, MN. See Bloomberg USCRUHC1:IND. Closing price yesterday was $73.60 /barrel, down $0.22 from the previous day. Keep in mind this is a terminal price, not the price at the wellhead which would typically include a transportation charge of anywhere from $4-$7/barrel, which would mean $65/barrel that JayBee mentioned would be possible at the wellhead.

A unit crude oil train ran over the Maine Montreal & Atlantic enroute to St. John, NB (Irving Refinery) this past weekend. It is the first such train to run over MMA tracks (ex-CP, ex-CDAC, also some mileage ex-BAR?).

Discussion of moves specific to MMA is taking place in this thread.

GO'K, I spoke with some oil industry experts this week... sounds like, as you've pointed out, the general concensus is that rail will remain a significant factor in the Bakken due to shipping flexibility (as Jaybee said, "chase the best price") and the expectation of continued WTI-Brent spread. Sounds like I may have been overstating my expectations on when/how much of pipeline conversions.

One interesting tidbit that I don't think has been mentioned here: It's illegal to export US crude oil (though refined products are not restricted). Now just how we are legally exporting some to Canada remains a mystery to me; I imagine there are a ton of loopholes in the law.

Cowford wrote:
One interesting tidbit that I don't think has been mentioned here: It's illegal to export US crude oil (though refined products are not restricted). Now just how we are legally exporting some to Canada remains a mystery to me; I imagine there are a ton of loopholes in the law.

Selling Crude Oil to a Canadian refinery is not considered as an export sale, neither is buying Crude Oil from Canada considered as importing Oil, both are the result of NAFTA.

gokeefe wrote:A unit crude oil train ran over the Maine Montreal & Atlantic enroute to St. John, NB (Irving Refinery) this past weekend. It is the first such train to run over MMA tracks (ex-CP, ex-CDAC, also some mileage ex-BAR?).

Discussion of moves specific to MMA is taking place in this thread.

Second CP/MM&A train for Irving Oil should be in Montreal late today (Monday June 18th). Train 606-249.

"Selling Crude Oil to a Canadian refinery is not considered as an export sale, neither is buying Crude Oil from Canada considered as importing Oil, both are the result of NAFTA."

Ah, NAFTA rules would make sense... thanks. However, the trade must still be classified as import/export. (EIA, for instance, counts Canadian crude as an "imported".)

Third train to St. John, NB for Irving Oil via CP/MM&A, perhaps we are passed the test trips and are now in regular service.