North Dakota Bakken Crude Oil

Even if railroad transportation is not mentioned within this article appearing in Today's Wall Street Journal, it certainly establishes the significance of the North American deposits of crude. Within a reasonably short time period, the article suggests that the US will only need rely on domestic sources or those within North America.

I still continue to hold that the Middle East producers through OPEC could choose to flood the market and make these developing North American sources economically untenable.

Finally, I trust that the web makes all the graphics available that appear in the print edition; they remarkably display where the crude lays; anyone here can mentally "overlay" what rail lines serve each deposit.

It is worth a review:

http://online.wsj.com/article/SB1000142 ... 24264.html

Mr Norman, I read that article this morning and was really surprised to see one research firm looking at a $65/bbl target price for crude in 2013. I'm guessing such a price reduction over 2012 is a factor of demand (i.e. economic growth, or lack thereof) more than supply... which is very concerning.

Gilbert B Norman wrote:I still continue to hold that the Middle East producers through OPEC could choose to flood the market and make these developing North American sources economically untenable.

I don't think anyone has enough spare capacity to pull that off. I do think that to a certain extent the Saudis may be trying this right now by pumping at full capacity into the trough but depending on the circumstances they may not have an option. Also a lot of exports have been switching from Iran to Saudi Arabia so as far as they are concerned there is legitimate demand that they need to continue to meet even with Brent prices below $100/barrel.

Cowford wrote:I'm guessing such a price reduction over 2012 is a factor of demand (i.e. economic growth, or lack thereof) more than supply... which is very concerning.

I'm not so sure for several reasons, first being that all of this crude will be consumed within the US or Canada. Because it won't really make it on to the US market there's potential for a collapse in continental oil prices which might not be mirrored in global prices. Second, the impact of an additional 500K+ barrels of oil/day to US supplies is far more significant locally then globally, again another reason to see this as a supply issue. Finally, every sign that I am seeing appears to indicate that the U.S. economy will be poised to be one of the healthiest i the developed world for some time to come. Another reason to see demand issues as being the lesser of the two factors.

Here is a digest of the latest "Director's Cut" produced for the Director of the North Dakota Department of Mineral Resources.

1. Preliminary figures indicate production in April totaled 18,281,116 for a daily rate of 609,371 barrels/day (a new record high).

2. April rig count was 209, May rig count was 211, 212 as of June 19, 2012. All time high was 218 on May 29, 2012.

Key Passage:

The idle well count reversed the normal trend and increased by 76 leaving an estimated 339 wells now waiting on fracturing services. This is expected to lead to significant production increases in June and July as additional fracturing crews begin work. Crude oil take away via pipeline is almost 30% below production, but rail and truck transportation are adequate to keep up with near term production projections. The North Dakota Sweet posted price to NYMEX-WTI discount has dropped to -12% but NYMEXWTI to Brent discount remains at -15%. This is forcing an increasing amount of North Dakota crude oil onto rail transportation so it can reach destinations that pay Brent price. Gasoline prices responded to crude oil price changes with a $0.20 per gallon drop, but when the Mandan refinery expansion got underway the price went back up $0.10. The large number of area specific summer blends required by EPA reduces the ability to move gasoline between markets.

Increases in production without corresponding increases in pipeline capacity will almost certainly have to be met by solutions using rail logistics. At least for the moment locations seeing Bakken Oil transits can expect to see substantial traffic increases over the next 4-8 weeks.

gokeefe wrote:Increases in production without corresponding increases in pipeline capacity will almost certainly have to be met by solutions using rail logistics. At least for the moment locations seeing Bakken Oil transits can expect to see substantial traffic increases over the next 4-8 weeks.

The railroads can only move as much crude as they have cars to carry it. Tank car makers have a backlog of about 200 miles of the rolling pipeline. They'll be busy building new tank cars for at least the next 15 months.

jstolberg wrote:

gokeefe wrote:Increases in production without corresponding increases in pipeline capacity will almost certainly have to be met by solutions using rail logistics. At least for the moment locations seeing Bakken Oil transits can expect to see substantial traffic increases over the next 4-8 weeks.

The railroads can only move as much crude as they have cars to carry it. Tank car makers have a backlog of about 200 miles of the rolling pipeline. They'll be busy building new tank cars for at least the next 15 months.

What are the indications on tank car availability for leasing?

My original estimate was only about half of what it should have been.

Tank cars continued to drive demand. First-quarter orders of 6,479 tank cars brought backlogs as of March 31 to 32,843 units, more than nine quarters' worth at current production rates.

http://www.progressiverailroading.com/p ... ran--30943

Since then, CIT has exercised an option another 1,500 tank cars and Philips 66 has ordered another 2,000.
http://www.joc.com/suppliers/cit-rail-o ... w-railcars
http://www.msnbc.msn.com/id/47739894/ns ... AjZkKNnChM

According to Professional Logistics Group there are no 32,000 gallon tank cars or sand hopper cars available.
http://www.slideshare.net/plgbarton/nor ... ics-issues slide 16

jstolberg wrote:According to Professional Logistics Group there are no 32,000 gallon tank cars or sand hopper cars available.
http://www.slideshare.net/plgbarton/nor ... ics-issues slide 16

John,

I went through the slideshow. As you mention PLG indicates there are currently 0 sand cars and 0 tank cars available on the domestic market for lease. I'm really amazed by that statistic. Obviously this dynamic is now driving the decisions by leasing companies to order large numbers of new cars. What is even more interesting is that these decisions appear to strongly indicate that the leasing companies expect to be in the oil business for the long term.

I was even more taken aback by the projected production statistics from the Marcellus shale in PA. 700,000 barrels per day of new production by 2013 is a huge number. That is more than what the Bakken is producing right now, which has already had a major effect on oil prices.

gokeefe wrote:

jstolberg wrote:According to Professional Logistics Group there are no 32,000 gallon tank cars or sand hopper cars available.
http://www.slideshare.net/plgbarton/nor ... ics-issues slide 16

John,

I went through the slideshow. As you mention PLG indicates there are currently 0 sand cars and 0 tank cars available on the domestic market for lease. I'm really amazed by that statistic. Obviously this dynamic is now driving the decisions by leasing companies to order large numbers of new cars. What is even more interesting is that these decisions appear to strongly indicate that the leasing companies expect to be in the oil business for the long term.

I was even more taken aback by the projected production statistics from the Marcellus shale in PA. 700,000 barrels per day of new production by 2013 is a huge number. That is more than what the Bakken is producing right now, which has already had a major effect on oil prices.

Be wary of PLG's information as it has become dated, based upon the date of presentation, the information on which it was produced was developed at least one year ago. There has been no large scale oil drilling in the Marcellus Shale formation since then, and with the development of the Bakken, Eagle Ford, and other smaller plays, I seriously doubt that there will be any large scale oil development in the Marcellus in the reasonable near term. Assuming there really is as much potential oil there as PLG postulates.

A poster in the Oil Train thread in the PAR forum indicated the very idea of oil in the Marcellus was wrong and that these people had confused wet liquids (gas) with oil.

Mr. O'keefe et al who follow petroleum industry affairs, I wonder what impact, if any, this development, should it move forth, have upon demand for Bakken Crude, and most particularly, continued use of railroad transportation to handle the product:

http://dealbook.nytimes.com/2012/07/23/ ... f=business

As American Petroleum Institutes's "pitch lady", actress Brooke Alexander (a one-time soap opera vixen), often reminds TV viewers that Canada is USA's largest trading partner for petroleum products. Now, a Canadian concern may be bought out by state owned Chinese business entity, which certainly will reduce the amount of Canadian petroleum available for trade with the US.

Unfortunately for the railroad industry, the greater the demand for Bakken Crude, the greater will be the demand, and economic justification to do so, for a pipeline to handle the crude to processing facilities (refineries).

Finally, we should note that this same Chinese concern once attempted in the past to acquire an American petroleum producer, Union Oil of California - UNOCAL (once marketed products at retail under the "76" brand). Such was without success.

Mr. Norman,

I had noticed this deal in the news and wasn't sure what to think of it. Thank you for calling our attention to it.

First, I think there are some pretty substantial regulatory hurdles which CNOOC will have to pass. As we saw with UNOCAL there are no real guarantees that they will be successful.

Second, indications are that there are several specific circumstances in play in the Bakken which are likely to keep rail as the primary means of transit for the long term, one of these are the long term concerns with production tendencies for these types of wells. Indications are that they tend to spike and then tail off perhaps somewhat dramatically. As the extraction technology continues to mature there have already been some incremental improvements in this regard and there likely will be more in the future. These tendencies do not bode well for pipeline construction which needs a stable production base. At least for the moment the Bakken does not appear to be predictable enough for pipeline operators to build more capacity than what is already planned or in place. All of this could easily change but at this moment that doesn't appear likely.

I remain amazed at the good that is being done in Maine already by the relatively small amounts of this oil passing through on the state's rails. There are very strong indications that at least one of the state's major railroads will be resurrected by this traffic.

Hunter Harrison announced at the 2Q Analyst's Conference Call, that Canadian Pacific will achieve the 2013 target for Crude Oil carloads announced at the 1Q Conference, before the end of 2012, one full year early. Needless to say inspite of the uptick in the OR for 2nd quarter, the stock market was bullish on the news and CP's stock hit a 52 week high shortly after the conference ended.

An interesting New York Times column appears today:

http://www.nytimes.com/2012/07/26/opini ... s-are.html

Brief passage:

• Right now you are probably asking yourself: “What would it be like to live in a place with an unemployment rate of 1 percent?”
  
  Me, too! So I went to Williston, N.D., to find out. There are certain things that journalists do as a public service because you, the noble reader, are probably not going to do them for yourself — like attending charter revision meetings or reading the autobiography of Tim Pawlenty. Going to Williston is sort of in this category. The people are lovely, but you’re talking about a two-hour drive from Minot.
  
  If you did come, however, you would feel really, really wanted. Radio ads urged me to embark on a new career as a bank teller, laborer, railroad conductor or cake decorator. The local Walmart has a big sign up, begging passers-by to consider starting their lives anew in retail sales. The Bakken Region Recruiter lists openings in truck driving, winch operating and canal maintenance work, along with ads for a floral designer, bartender, public defender, loan officer, addiction counselor and sports reporter. All in an area where the big city has a population of around 16,000.

I can see it now; sophisticated New Yorker visits the "Oil Patch" in search of a column. While I do read and enjoy Gail Collins' thoughts in The Times, I do think her trip to Williston was a bit of an eye opener for her. Apparently she didn't use Amtrak's Empire Builder to get there; rather, I would guess she flew into Minot and rented from there (likely, The Times travel desk only knows of the Acela).

Some interesting information regarding pricing and shipping regarding Bakken Oil can be found in the RBN Blog starting with these;

http://www.rbnenergy.com/the-bakken-buc ... ing-part-1

http://www.rbnenergy.com/Bakken-if-rail ... e-is-wrong

http://www.rbnenergy.com/Rail-it-on-ove ... akken-East


http://www.rbnenergy.com/railing-agains ... i-discount