North Dakota Bakken Crude Oil

[gokeefe]

One of the lesser known facts about the Bakken oil formation currently being drilled in North Dakota is its relative isolation from the national pipeline network has necessitated the wide use of oil tank cars for bulk crude shipments within the U.S. in mass quantities for the first time in perhaps decades.

Here is an example from a recent news article:

Much flutter has focused on the Keystone XL pipeline over the last year in eastern Montana, particularly over the relief the Baker on-ramp could provide to moving crude from the Mondak region into the Market. The last month has many on edge about whether that will happen so the question comes to mind “what if it doesn't?” Sunoco Logistics may have at least a partial answer for the region.

After just over a month of regional prospecting, Sunoco Logistics says they are now ready to ship MonDak crude for processing on the east coast. The details are not yet complete, but the company is looking at shipping primarily to their Eagle Point facility which is near their only company-owned refinery in Philadelphia, Pennsylvania and possibly to ConocoPhillip's Bayway Refinery. They are in talks now with additional companies that could double that amount.

In fire-line style, they hope to move truck to rail starting with around 25 rail cars a day beginning in January and then grow that operation to 60 rail cars per day.The original plan is to deliver about 20,000 b/d of Bakken crude in about 60 rail cars or about 39,000 bbl in two days. The company plans to reach that target by gradually building up to it.. The rail delivery could reach a maximum capacity of 70,000 b/d in the future, depending on the Mondak crude demand in the northeastern corner of the country. Sunoco Logistics is still in discussions with potential customers for this delivery.

I'm opening this thread for discussion of the Bakken Crude Oil Rail shipments and their overall effect on energy prices, with potential for follow on discussion of macro economics and effects on national rail shipping volumes.

There have been some major developments in the past 60 days, including the opening of a major new rail shipping terminal (100,000 bpd/train capacity).

[gokeefe]

From Progressive Railroading, December 7, 2011

Yesterday, Enbridge Energy Partners L.P. announced plans to spend an additional $145 million to enhance the capability of its North Dakota crude-oil distribution system in the Bakken Shale region. The project calls for expanding capacity at a BNSF Railway Co.-served terminal near Berthold, N.D., by 80,000 barrels per day (bpd) and constructing a rail-car loading facility to accommodate additional volume.

Enbridge Energy plans to build a double-loop unit-train facility and other terminal facilities adjacent to existing operations near Berthold. The rail facility will be designed to stage three unit trains at a time. The full 80,000-bpd of rail export capacity is scheduled to be in service in early 2013.

“Our Berthold rail project complements a series of expansions Enbridge has undertaken to expand transport capacity from North Dakota,” said Enbridge Energy President Mark Maki in a prepared statement. “It integrates high-quality Bakken crude into Enbridge's expanding portfolio of pipeline projects that access premium markets across the United States.”

[gokeefe]

Author Matt King posting on Seeking Alpha has a number of well written articles regarding the Bakken:

This one is provided in part here for general context:

Many people wonder how much oil is in The Bakken and if it is a hoax. Many people write about the bright prospects, the novice geology terms, and the companies who are in it. But, many people have it wrong. In this article, I would like to focus on the facts, the oil production potential of the Bakken and what it means for the future of oil production.

The Bakken is not 200,000 square miles as some would have you believe. It is closer to 20,000 square miles. The Three Forks formation, which is similar to the bakken and produces oil, underlies the entire bakken area and then some. Currently, wells are drilled on 640 to 1280 acre spacing units. That translates to 1 spacing unit 1 square mile to 2 square miles long. Initially, to protect the lease on that unit, an oil company will need to hold that spacing unit by a producing well.

Each well that is drilled is thought to have approximately 500,000 barrels of recoverable oil with an initial production somewhere close to 1000 barrels per day. After only a few years, this production quickly tapers off to under 200 barrels per day and eventually to zero after about 25 years.

Development of The Bakken/Three Forks will eventually encompass up to eight wells drilled per 1280 acre spacing unit. That equates to 8 wells per 2 square miles, or the potential for 80,000 well sites if both the three forks and bakken are present over the entire 20,000 square miles. Harold Hamm of Continental Resources predicts somewhere around 50,000 wells will be drilled over the next two decades, and this is how: with 1280 acre spacing units utilizing mutli pad drilling.

Each oil rig in the Bakken drills approximately one well per month. The rig count is at 204 which equates to 204 new wells being drilled per month or roughly just over 2200 wells per year. Granted these wells come on strong, let's only assume each well adds 100 bbl/day incremental production. In that respect, ND should be able to increase its output, albeit increasing at a declining rate, by about 200,000 bbl/day per year. ND currently produces around 450,000 bbl/day and will soon overtake California as the number three oil producing State. Of course, weather, input shortages, regulated hydraulic fracturing, and crude takeaway options can impact that number significantly. If current assumptions hold true, the drilling will last up to 30 years in the Bakken and Three Forks. That being said, investments in related Bakken companies will continue to be strong unless the EPA halts fracturing or the price of oil falls below $55 per barrel.

[gokeefe]

Another good article from author Matt King regarding rail and the Bakken:

Enbridge announced today their plans to increase pipeline capacity for Bakken crude into Berthold, ND by 80,000 barrels per day. What’s interesting is that those additional 80,000 barrels per day do not have an outlet via pipeline. This 80,000 barrel inbound capacity will have to be matched by an outbound transportation mode: in this case, the railroad. The BNSF Railway serves Berthold, ND and surrounding areas directly. The Canadian Pacific Railway has its mainline and affiliate line (DMVW) in close proximity as well. Although there is competition, BNSF will be the choice for Enbridge because they are the pro at moving crude by rail.

As we have discussed before, crude by rail is not a new concept. Crude by rail has been going on since the time of Rockefeller. However, it has never been done on a scale of this magnitude. EOG Resources was the pioneer in shipping unit trains of crude out of the Bakken, and many others are quickly following suit. While producers such as Hess and others are building their own private terminals, there are a few terminals coming online that will offer the capability to ship by rail to third parties.

The pipeline companies initially baulked at large-scale rail takeaway solutions and stated that pipelines were the only true long-term solution. But, with the uncertainty surrounding large scale international pipelines, due to the current regulatory environment, many pipeline companies and pipeline associates have jumped on board.

Rangeland Energy, a member of the EnCap Investments group, is built mostly of management from the pipeline world. In addition to supplying a crude by rail solution, their intent is to build pipeline gathering systems to route crude directly to the rail loading sites thereby reducing handling and short-haul transportation costs.

Bakkenlink Pipeline LLC initially set out to provide a connection to the Keystone XL pipeline for an on-ramp for Bakken crude. After the continued delays, Bakkenlink intends to build a crude unit train loading facility on the south end of the Bakken field as well as build a gathering system to connect directly to well sites.

Eighty-Eight Oil, a subsidiary of the True Companies, recently announced an agreement to ship crude by rail out of the Lario Logistics facility near Dickinson, ND, dubbed the “Bakken Oil Express.” Under the True Companies umbrella exists the Bridger Pipeline group which also sought to provide an on-ramp for Bakken crude to the Keystone XL.

[gokeefe]

Further informative article from author Matt King:

BNSF Railway (BRK.A) has the most modern, highest speed, and accessible railroad in the Bakken region. Although others come close, such as the Canadian Pacific Railway (CP) and CP's partner lines, BNSF seems to have the greatest advantage. Not only does crude oil need to get out of developing oil regions, but input commodities, such as sand and steel, need to find its way in to drill out the oilfield. For this article, I will focus on outbound crude oil.

BNSF's vice president of marketing was recently quoted as saying he expects rail to capture at least 25% of the oil produced in the Bakken for the long term. Today, including oil production in Eastern Montana, the Bakken, Three Forks, and other formations produce approximately 500,000 bbl/day of crude oil and projections are it could reach up to 1.2 million barrels per day in the near future. If that is the case, let us assume BNSF hauls approximately 125,000 bbl/day today. With publicly available information, we can calculate how much revenue this means to the railroads and can then estimate their margins.

Each tanker rail car holds between 600 and 700 barrels of oil. For this analysis, let us assume 680 barrels per car. 125,000 barrels per day divided by 680 per car, equates to 184 cars per day being shipped by rail. Because most of the oil wants to go to the gulf coast to take advantage of price differentials, let us assume the destination is Houston, TX and that all of the volume moves in unit trains. The published unit train rate from Williston to Houston is $4005 per car. This equates to $736K revenue per day and $268 Million revenue per year. If production doubles, as some predict it will, revenues could reach $1.4 Million per day and $537 Million per year out of North Dakota/Eastern Montana.

For the bottom line, let's assume the railroads operate at a 35% margin, this means shipments of ND crude oil could end up adding $188 Million to BNSF's bottom line. For context, BNSF reported $2.1 Billion net income in 2008 - the last year it was a public company. Berkshire Hathaway in 2010 reported approximately $5.1 Billion earnings before income taxes in its Railroad, Utilities, and Energy section and earnings after tax of $3.5 Billion. If BNSF is right, the growth in crude alone could add upwards of 5% to this section of Berkshire Hathaway.

Although Canadian Pacific's lines are primitive in comparison to BNSF's, Canadian Pacific and Union Pacific (UNP) have teamed up to offer somewhat comparable crude transportation options out of North Dakota's growing oilfields. Canadian Pacific's feeder line in New Town, ND is well positioned in the center of the Bakken - just north of Lake Sakakawea. However, this line is a very long branch line with limited infrastructure. To alleviate infrastructure constraints, Canadian Pacific runs shorter unit trains, around 80 cars, and hands the trains off to the Union Pacific in Minneapolis for furtherance to the Gulf Coast and other premium crude markets. If CP and UP continue to aggressively develop destination markets and upgrade infrastructure in North Dakota, they may be better positioned to take some of the market share from BNSF.

[gokeefe]

Matt King may not be well known to most of you, I found him on Google.

However, when the market analyst for a sober news wire like Reuters starts writing about a "revolution" any serious reader should start paying attention:

Dec 22 (Reuters) - The magnitude of North Dakota's oil revolution is hard for outsiders to grasp. Superlatives fail to convey the speed and scale of the transformation and its impact on the economy of the state.

The fracking boom is upending the traditional petroleum geography of the United States. On current trends, North Dakota will overtake California as the third-largest oil-producer in the United States by the end of Q1 2012. Output is likely to exceed production from Alaska by the end of 2012 or early 2013. Only Texas will be producing more crude.

Fortunately, the state government publishes a wealth of statistical information. Cold numbers are the only way to understand what is really happening on the northern plains.

In October, the state's oil output rose to 488,000 barrels per day, up by a stunning 9 percent compared with the previous month (464,000 b/d) and an extraordinary 42 percent compared with October 2010 (344,000 b/d).

There were 5,942 producing oil wells, according to the Oil and Gas Division of the North Dakota's Department of Mineral Resources. The well-count has risen by 863 over the last 12 months and 117 in October alone.

More than 190 rigs and crews are currently drilling for oil, up from 140 at the same period last year, and 60 in 2009. The rig count represents almost 10 percent of all drillers and rigs operating across the United States, according to oilfield services company Baker Hughes.

The resulting upsurge in production is set to continue into 2012. In the three months between September and November, the state government issued permits for 543 more wells -- 470 for development within existing fields and 73 wildcat wells to explore new areas. The number of new permits was down slightly compared with 2010, when 633 licences were issued in the same period, but more than double the number issued in 2009.

There are already nine rail facilities capable of moving 300,000 b/d out of the state but five more are planned and will take outbound rail capacity to more than 700,000 b/d by the end of 2012, according to the state pipeline authority. A slew of new pipelines and expansions are also proposed or underway to raise export capacity.

The rest of the article is about as equally breathless as the beginning.

[gokeefe]

Further reporting from Bloomberg on CP's Bakken Oil shipping terminal in Saskatchewan:

Canadian Pacific Railway (CP) Ltd. said it will spend more than C$90 million ($89 million) to boost trainload shipments of crude pulled from the Bakken formation in Saskatchewan and North Dakota.
The railroad will move more than 13,000 carloads, each carrying about 650 barrels of light crude oil, from the North Dakota Bakken this year, almost quintupling last year’s shipments, said Ed Greenberg, a CP spokesman in Minneapolis. The Calgary-based company expects crude shipments to grow to 70,000 cars annually.
CP opened a rail-loading facility in southern Saskatchewan today, its second for Bakken crude in the province. The facility, 25 miles (40 kilometers) from the U.S. border, allows railcars to be loaded from trucks and will be operated by closely held Bulk Plus Logistics LP, the company said in a statement.
“CP will take what it has learned and the products developed in North Dakota and apply them in the emerging Saskatchewan and Alberta Bakken markets,” said Tracy Robinson, CP’s vice president of energy and merchandise in Calgary. “The model that we developed in North Dakota is proven and we’re now bringing that north.”
Producers have turned to rail shipments to move Bakken crude because of a lack of large pipelines in the isolated region. North Dakota oil output jumped 28 percent to 464,121 barrels a day in September from a year earlier, according to state statistics.

[gokeefe]

Here's a great video from youtube of a Bakken Oil Train.

Terminals are currently under construction or in operation that would see these types of movements multiple times daily.

[Gilbert B Norman]

Here is a map that appears in The Times along with a related article showing "where the black stuff is". One can quickly see that the GN traverses through the middle of the Bakken region.

[GOLDEN-ARM]

i dont know why you messaged me with this. i dont care about any pipeline discussions, and this isnt my forum.

[gokeefe]

i dont know why you messaged me with this. i dont care about any pipeline discussions, and this isnt my forum.

GOLDEN-ARM,

You're the moderator for several Class I forums in particular the Union Pacific which stands to gain substantial overhead traffic from unit oil trains originating in the Bakken and heading to Cushing, OK and refineries in Texas and Louisiana. The purpose of letting you know about this thread was to assist forum moderators in consolidation of discussion that might come up regarding the rail traffic of Bakken oil transiting the national freight rail system. Having you be aware of this discussion would prevent diffusion of the discussion across multiple threads in multiple forums with all parties involved being unaware of the parallel threads elsewhere. My hope is that moderators of the individual Class I forums will let their users know about this discussion thread should the Bakken oil become a topic of discussion within their own forums.

I've always seen Railroad.net as a place where people come and discuss these things because they have an expectation that the discussion offered has all interested parties at the same table. Hence, my decision to post the thread and let you and other moderators know about it.

I took the step of starting the thread in the first place because the renewed exploration in the Bakken Formation in North Dakota and parts of Canada is among the single most significant energy discoveries within the continental United States in probably over half a century. I cannot emphasize enough the effect that adding an additional 700,000 to 1,000,000 barrels per day in domestic production of light sweet crude oil will have on the national economy. Due to the shortage of pipeline capacity in that area rail based shipment will likely be the only way to move most of the Bakken crude to the national pertoleum distribution and refining network. As such this topic of discussion, at least in my mind, is of national strategic and economic consequence. At a minimum I would think we should attempt to provide a good venue for discussion of developments in the Bakken Oil Formation and its effect on our national rail system here.

Both KCS and UP are likely to play a major, but not singular part in this effort. As a result I placed this topic in the Class I: General Discussion forum due to its relevance to almost every single Class I railroad in the United States and then advised you and the other moderators of such.

[Gilbert B Norman]

Might anyone know what level of HAZMAT placcarding these "Oil Cans" carry? Being a good company man to the end, i turned in my Grazziano's Tariff when I left the MILW now thirty years ago.

Trains like that shown in the video linked by Mr. O'Keefe come by my home on the Chicago Sub, but I've never had occasion to be up close and personal enough to observe the placcard.

[gokeefe]

Mr. Norman,

Placard # is 1267

[gokeefe]

According to this article in the Dickinson Press North Dakota is expected to overtake Alaska and California in oil production next year.

North Dakota is ranked fourth in the country for oil production. Texas produces the most oil, followed by Alaska and California, respectfully. Ritter said depending on Alaska and California’s decline, North Dakota should overtake the two states next year.

“We are going up and they are going down,” she said. “It’s just a matter when and where we will meet in the middle.”
...
Ritter wrote in an email that production is expect to grow by 8,000 to 20,000 barrels per day each month, adding the state could hit 500,000 barrels per day by the end of this year. North Dakota could potentially produce almost 600,000 barrels per day by the end of 2012, and the state could continue to see records.

Keep in mind that virtually 100% of all production above 300,000 bpd (current pipeline capacity out of North Dakota) is going to get shipped by rail.

[gokeefe]

Further serious evidence of macro-shifts in the U.S. oil & gas markets:

From CNBC, "As US Drivers Cut Back, Refiners Export More Fuel"

While U.S. drivers continue to cut back at the pump, refiners are increasingly sending more gasoline and diesel fuel overseas, making the U.S. a net exporter of refined products for the first time in more than a half century.
...
Andrew Lipow, president of Lipow Oil Associates, said the EIA October data revealed other important trends. One is that there was another big drop in consumer gasoline demand, even as prices at the pump came off the summer highs. The other is that the U.S. increasingly exporting refined products, led by distillates.
...
Gasoline exports have also grown to the point where they are getting close to equaling the amount of imports. The number of exports totaled 562,000 barrels a day, compared to imports of 596,000.
...
For all refined petroleum products, the U.S. in the first 10 months of 2011 exported 848 million barrels and imported 750 million. Lipow said he believes this if the first time since World War II that the U.S. will be a net exporter of refined petroleum products, but government data on the EIA website only goes back to 1973.Even with its ability to export, the U.S. refining industry is not operating at peak capacity. It is currently running at a rate of 84.7 percent, but the picture for the industry could also change in coming months as the east coast continues to see refineries shut down. Two big closures are pending in the Mid-Atlantic for 2012.

“One reason the U.S. is exporting more gasoline is that ethanol has contributed more fuel supply so refineries have a surplus of gasoline made strictly from crude oil,” Lipow said.

The article goes on to mention two other important points, first that the U.S. is now exporting ethanol to Brazil and second that due to the balance between refining capacity and domestic demand the price for gasoline will now largely be controlled by the price for crude oil.

In my opinion this means that any continued increase in domestic production of crude oil will have an inordinate effect on the price of gasoline (or other distillates for domestic consumption) because of available slack capacity in the refining sector. This should also result in a widening of the spread between West Texas Intermediate (U.S. Light Sweet Crude) and the Brent (North Sea Crude) market prices.