North Dakota Bakken Crude Oil

Even though there appears to be an anti-railroad "slant" to this reporting in Today's Wall Street Journal, I find this to be one of the most reinforcing pieces I've read in general circulation media suggesting that railroad movement of crude oil is here to stay and by choice of shippers:

http://online.wsj.com/article/SB1000142 ... 36978.html

Brief passage (selected to show the slant contained within the reporting):

• But refiners Valero Energy Corp, Tesoro Corp, and Phillips 66, have all said they won't sign contracts as currently proposed to take crude from Freedom and will instead continue to use rail cars and barges to deliver more oil from North Dakota, Canada and even Texas to the gates of their California refineries.
  
  Their lack of interest in the pipeline underscores how these other modes of oil transport, once seen as stopgaps until new pipelines could be built to deliver the growing amount of crude produced in Alberta, Texas and North Dakota, are becoming a permanent fixture of the North American energy landscape

Rightly so, the article addresses environmental concerns; there is within a recitation of various spills arising from handling of crude by rail. These incidents appear to be in the 250bbl range.

However, earlier this week, the Journal reported on a spill near Cushing OK involving a pipeline in which the spill was in the 2500bbl range:

http://online.wsj.com/article/SB1000142 ... 26740.html

Brief passage:

• Crews worked to clean up some 2,500 barrels of crude that spilled over the weekend at an oil-storage terminal in Cushing, Okla., the third-biggest crude spill seen in the U.S. this year.
  
  The leak, at an Enbridge Energy Partners LP pipeline connected to one of the more than 85 tanks at Enbridge's Cushing storage facility, comes as many pipeline companies seek to expand their networks to accommodate growing energy production in North America. At least one major project, the Keystone XL pipeline proposal to connect Alberta's oil sands with Texas refineries, is facing significant backlash from environmentalists concerned about leaks.
  
  The Enbridge spill took place at a crude-gathering site where crews are ready to handle emergencies. It follows the rupture in March of Exxon Mobil Corp.'s Pegasus pipeline, which spilled an estimated 5,000 barrels of heavy Canadian crude into a Mayflower, Ark., neighborhood. Earlier that month, more than 5,000 barrels of oil leaked from a Lion Oil Trading & Transportation Inc. storage tank in Magnolia, Ark., with some flowing into a bayou.

All told, and especially considering the pro-pipeline editorial positions the Journal has recently taken, this is one of the more positive pieces regardinbg railroads handline crude that I have read away from pro-industry sources such as TRAINS.

Most recent Director's Cut for the North Dakota Department of Mineral Resources is available online dated May 15, 2013.

April production reached a new all time high of 782,812 barrels per day. Notes indicate that the winter production season was very challenging. Expect major new increases in production throughout the summer. Rig counts remain steady.

I think they will cross the 800K bbbl/day threshold early this summer (if they haven't already). 1M bbl/day could be in sight early next year.

In the meantime production in Iraq will continue to increase through the next year putting substantial pressure on Brent prices as well. I would say at a minimum we should expect stable prices with potential for some decrease.

Current production in Iraq is now at 3.125M bbl/day an all-time post war high. Several fields in the south of the country will come online within the next three to six months adding an additional 400K bbl/day of product to the international markets. A small cutback by the Saudis would likely be sufficient to mitigate the effects of this additional crude coming onto the market but I think the day of reckoning for OPEC is now on the horizon. The Saudis cannot afford to continue to cede market share to the Iraqis forever. On the other hand the Iraqis are going to want to pump as much as they can as fast as they can in order to have the capital necessary to continue to rebuild and redevelop.

At least for the very near term I would project slowly declining prices of Brent. Assuming the Saudis simply trim back in sync with what Iraq brings to market a year end target of $90-$95/bbl seems reasonable. This price point may add some additional pressure to the Bakken fields development but is still well within the range of profitable production.

Most of the above is based on data from this Bloomberg article as published at the Herald Business Journal, published out of Everett, WA.

LONDON -- Iraq is due to start pumping crude from two of its largest oil fields within weeks, creating a possible obstacle to future efforts by OPEC to curb supplies in the event of a drop in prices.

The Gulf state plans to start production at Majnoon within days, followed by Gharraf in July and West Qurna-2 by year-end, lifting capacity by 400,000 barrels a day, Oil Minister Abdul Kareem al-Luaibi said in Vienna Thursday before an Organization of Petroleum Exporting Countries meeting today. The nation, OPEC's biggest producer after Saudi Arabia, currently pumps 3.125 million barrels a day, he said, without specifying output capacity.

This article from the Financial Times illustrates perfectly why production levels in Iraq are of serious concern not just to other OPEC member states but to companies producing and transporting oil from the North Dakota Bakken shale.

Iraq has been officially excluded from the Opec quota system since the first Gulf war in 1990-91. But as production rises to a 20-year high, Iraq has grown too big to be ignored. At over 3m b/d, Baghdad is already the second-largest producer in Opec, and it is also competing directly for market share with Saudi Arabia in the fast-growing Asian market – where Baghdad has been offering its Basra Light crude at a discount of around $1 to Saudi’s Arab Medium in recent months.

Iraq has been forced to discount its crude to make up for variable quality, a result of the rapid expansion of production. But Riyadh nevertheless is getting worried about its neighbour’s pricing strategy.
...
“So far, the incremental demand is absorbing all the production – both from the US shale and from Iraq,” says an Opec delegate, who anticipates that Riyadh and Baghdad are not yet in a rush to settle their positions.

In this respect the status quo is unlikely to hold forever. As Iraqi production continues to rise the pressure will be on the Saudis. They have a breaking point and at this point due to their expansive government spending that is dependent on oil revenues they are unlikely to be able to tolerate losses of market share and lower oil prices for very long.

The Iraqis on the other hand are highly unlikely to be sympathetic to Riyadh's concerns as their primary focus will remain on reconstruction, redevelopment and in particular the significant social welfare needs of their own population.

In the meantime in the stable and prosperous northern Kurdish regions additional major exploration and field development is underway that is likely to yield major crude oil production. All of this is to say that global crude oil prices cannot continue to hold at the current high levels in the face of such large additions to the supply chain.

Unless Iraq self-destructs, notice that terrorist bombings are increasing. The biggest losers are likely to be Nigeria and Venezuela who need higher prices to avoid serious budget deficits. The Bakken producers can survive on $80 Oil, Venezuela, Nigeria, and possibly Iran can't.

Wouldn't be just great if every topic originated here at Railroad Net could move forth with the insightful thought shown here and presented to readers with maturity and respect?

Mr. O'keefe's report regarding Iraqi production is the very scenario that concerns me with regard to any shale production, Bakken and elsewhere, over here. There is all too great the risk that Mohammad Mosaddegh, King Farouk, El Presidente Hugo, or whoever is winning "King of the Castle" in the rogue's gallery at the moment, might start dumping crude on the market - not in a controlled manner as I would expect the Iraqis to do, but in such manner completely irrational and irresponsible.

While of course any consumer who feels "pain at the pump' would welcome any such action (how many consumers when making a choice to buy Citgo gas even think that it comes from a regime hostile to our government but rather that it seems to price about 2 cents a gallon less than other majors?), it would adversely affect North American shale production on the world market - and the railroads (as well as their observers such as myself) that are starting to believe crude oil is not some "flash in the pan" windfall that will be gone as soon as pipelines are built, but rather a traffic source that is here to stay.

Indicative of such is this report appearing in Saturday's Wall Street Journal:

http://online.wsj.com/article/SB1000142 ... 59596.html" onclick="window.open(this.href);return false;

Brief passage:

• Kinder Morgan Energy Partners LP said Friday it has cancelled plans for the $2 billion Freedom oil pipeline, a conduit that would have brought a direct stream of West Texas crude to refiners on the West Coast.
  
  The cancellation underscores the growing difficulty pipeline companies are having in selling new large-scale projects as oil producers and refiners increasingly rely on railroads to ship crude oil.
  
  Once seen as temporary necessities to deliver oil from emerging oil-producing regions in Alberta, Texas and North Dakota, rail cars have become a permanent fixture of the North American energy landscape because they allow refiners more diversity of supply.
  
  This trend means that pipeline giants like Kinder Morgan will have to focus on smaller pipeline projects and branch into other transportation segments, said Darren Horowitz, analyst at Raymond James

Finally, lest we forget that shale oil deposits in North Dakota and elsewhere are nothing new. Geologists have known of them for probably 100 years. I first learned of them taking Geology 101 - and that is now over fifty years ago. "Back then" the world price of crude was about $4bbl, and there was hardly the technology available to extract it at anything resembling a marketable price. Now there is parity between $100bbl and the cost of extraction - and railroad handling of crude is completely dependent upon that parity remaining in place.

Mr. Norman,

Before my full reply please allow me to note that to his credit Prime Minister M. Mosaddegh of Iran, 1951-1953 came to power the old fashioned way. He was a democratically elected and the leader of the Socialist (Tudeh) Party who showed no specific or direct signs of ever being interested in association with the Communists in the U.S.S.R. or China.

Unfortunately, and this is a point that to this day many Iranians have not forgotten, he was deposed in a coup engineered by the West (U.S. & U.K.) with the assent and heavy involvement of the Shah in favor of General Fazlollah Zahedi, the former Minister of the Interior. Unlike its tendencies with water, oil and politics mix quite well in most places. That certainly includes the Middle East. I too appreciate the tenor of this thread. It has become a very good place to discuss some very complicated issues with people who are well versed in the nuances.

JayBee wrote:Unless Iraq self-destructs, notice that terrorist bombings are increasing.

I would be extremely cautious about describing the current activity as an increase. Certainly there has been an increase in events which have received media coverage. In some cases there has even been an admission or indication by the Iraqi government that their raw data does in fact indicate a greater occurrence of security related events on their oil pipelines but that in of itself does not constitute per se an increase in the absolute national trend over the past two, five or even ten years. Iraq is probably more peaceful now than it has been at any point in time since Saddam came to full power in 1979.

JayBee wrote:The biggest losers are likely to be Nigeria and Venezuela who need higher prices to avoid serious budget deficits. The Bakken producers can survive on $80 Oil, Venezuela, Nigeria, and possibly Iran can't.

Agreed, however I feel that the economics of oil from West Africa are not entirely clear at all. Venezuela and even Iran are somewhat more transparent about their target price "needing" to stay over $100/barrel. I think Venezuela and Nigeria actually could handle $80 oil. Iran on the other hand probably couldn't, especially if you factor in the current international embargo which is forcing them to price their product at a discount relative to the Brent price.

Gilbert B Norman wrote:Mr. O'keefe's report regarding Iraqi production is the very scenario that concerns me with regard to any shale production, Bakken and elsewhere, over here. There is all too great the risk that Mohammad Mosaddegh, King Farouk, El Presidente Hugo, or whoever is winning "King of the Castle" in the rogue's gallery at the moment, might start dumping crude on the market - not in a controlled manner as I would expect the Iraqis to do, but in such manner completely irrational and irresponsible.

I wouldn't be too worried about this. As we have discussed before there is simply only one producer with sufficient spare capacity to undertake anything even barely resembling such an action and that's the Kingdom of Saudi Arabia. The rest of them generally pump at near the maximum of their nominal capacity all the time. The Reagan administration's success in convincing the Saudis to increase production was largely a one time event which is essentially and technically impossible to replicate in scope today.

The case of Iraq is interesting because of the sheer intensity of new production which will come online over the next few years. However, as some of the articles I am quoting have observed, a great deal of new crude is being absorbed by incremental demand not the least of these being replacement of lost production from Syria and Iran.

Gilbert B Norman wrote:While of course any consumer who feels "pain at the pump' would welcome any such action (how many consumers when making a choice to buy Citgo gas even think that it comes from a regime hostile to our government but rather that it seems to price about 2 cents a gallon less than other majors?), it would adversely affect North American shale production on the world market - and the railroads (as well as their observers such as myself) that are starting to believe crude oil is not some "flash in the pan" windfall that will be gone as soon as pipelines are built, but rather a traffic source that is here to stay.

I think the more likely issue is going to be OPEC getting into a serious fight with the Iraqis over when and how to arrange for the reentry of Iraq into the quota system, a prospect which I fully expect the Iraqis to delay, evade and dismiss for at least another 10 years if not a substantially longer period of time than that.

To address the your final points regarding pipelines perhaps the most disruptive aspect of this situation has not been merely the decision to use rail cars in the Bakken but due to the volumes the enormous addition of new tanker cars to national fleet pools which in turn has made railroad transportation of crude oil an option nationally as opposed to a niche utilization for North Dakota shale oil. The other aspect of this equation is that this change is occurring in for the first time since the 1910s during a period in which the railroads have been fully deregulated from the ICC scheme. During the last great major oil rush in the 1980s the U.S. railroads were still in recovery from the effects of the previous arrangements which had come about during the regulated era. As such I believe they would have been largely unable to respond to the new demand in the manner in which today's mega-Class I railroads have.

Finally, this observation, in honor of railroad.net's best known former employee of the Milwaukee Road, the North Dakota Bakken fields lie right in the middle of the former territories of the Great Northern, Northern Pacific and the Milwaukee Road. I believe that if there will ever be a reason to see some of this mileage either relaid or brought back to service it will be in large part due to the flood of new traffic originating right in the heart of the main lines formerly operated by these great companies.

If this article from the Saturday Billings Gazette doesn't "do it" for any remaining skeptics I don't know what will.

New government data show that 7.4 billion barrels of oil could be recovered from two massive shale formations spanning parts of the Dakotas and Montana, nearly double the amount previously estimated for the region.

The new number from the U.S. Geological Survey is based on data largely from oil company and state drilling records.

But unlike the agency’s 2008 estimate, it includes more than 3 billion barrels of oil believed held in the Three Forks formation, which is directly below the oil-rich Bakken formation.

Large-scale drilling in Three Forks didn’t occur until after that earlier assessment, and the formation is now estimated to hold as much recoverable crude as the Bakken, according to the USGS. The agency calls the formations the largest continuous oil accumulation it has ever assessed — and some industry insiders think its potential is even stronger.

“It’s a great number but it’s conservative,” said Ron Ness, president of the North Dakota Petroleum Council, which represents more than 400 companies working in western North Dakota’s booming oil patch.

Brent fell below $100/bbl earlier this week. Bloomberg had an excellent article describing the current situation and the future outlook for pricing.

Brent crude fell below $100 a barrel for the first time in a month and WTI declined as signs of a slowing Chinese economy and OPEC’s decision to maintain production boosted speculation supply will outstrip demand.
Brent slid as much as 0.7 percent to $99.67 a barrel, while WTI dropped as much as 0.8 percent. Chinese manufacturing indexes showed small businesses struggling, sapping momentum in the economy of the world’s second-biggest oil user. The Organization of Petroleum Exporting Countries maintained its output ceiling of 30 million barrels a day at a meeting in Vienna on May 31. Crude inventories in the U.S., the world’s biggest consumer of the commodity, are at the highest since at least 1931.

I consider this to be a significant technical breakthrough on crude oil prices and worth noting here. The bond market has also shown movement that would appear to indicate an economic recovery in progress which should continue to produce steady demand for energy. This trend would then have a stabilizing effect on any price declines in the energy market. For the railroads this represents continued robust growth in energy transportation with some potential major upside on cyclical lines of business like intermodal.

I will be interested to see what kind of physical plant decisions the Class Is will have to make if there's a major economic recovery coupled with the continued surge in energy production using rail based transport options. As mentioned previously this strikes me as one of the potential convergence scenarios where BNSF would take another look at some of their dormant corridors for relief use as secondary main lines.

Bloomberg also recently had an excellent article on the narrowing of the spread between Bakken crude and the benchmark crudes with substantial coverage of rail related reasons for the narrowing of the spread.

Bakken oil on the spot market strengthened to the highest level in more than a week as refiners and midstream companies increase the use of rail to bring crude from the middle of the country to the coasts.
U.S. Class 1 railroads transported 97,135 carloads of crude, or about 762,000 barrels a day, in the first quarter, the Association of American Railroads said yesterday in a quarterly report. That’s up 20 percent from the previous quarter, and more than double the first quarter of 2012.
As recently as 2008, trains moved fewer than 19,000 barrels a day of crude. PBF Energy Inc. (PBF) and Global Partners LP (GLP) are among companies that invested in infrastructure to move crude from North Dakota’s Bakken shale formation, which has limited pipeline access. The region’s oil production climbed from 113,000 barrels at the end of 2008 to 719,000 barrels in March, according to the state’s Industrial Commission.

Very good video analysis of the current situation in the oil markets by an energy analyst from Singapore.

Victor Chum, Vice President at IHS Energy Insight in Singapore discusses his views on oil prices trends for the next two years. OPEC is seen as continuing to weaken due to the increase in "tight" oil production from within the United States.

Some breathing room now on rail tank car availability.

The number of railcars loaded with crude or refined fuel per week in the United States has dropped by about 5% since reaching a record 14,500 tank cars during May, according to Reuters calculations based on data from the Association of American Railroads released on Thursday.

Most analysts say it is likely to be a temporary lull. Some pin it on a reduction in Canadian output due to maintenance, and refinery work in the U.S. Midwest.

Sandy Fielden, an analyst at consultants RBN Energy, said there are signs that lease rates for tank cars are also ebbing.

http://business.financialpost.com/2013/ ... =e92b-20c1" onclick="window.open(this.href);return false;

Shippers are returning to pipelines now that the spread between Brent crude and West Texas Intermediate has narrowed. The difference is now about $8 per barrel and the cost to ship oil by rail is $12 per barrel or more.

Rail tank cars not needed to carry Bakken crude from North Dakota may soon be carrying oil from New Mexico.

BNSF will begin shipping crude oil in unit trains from New Mexico for the first time later this year, following completion of expansion work at a transload facility in Carlsbad, N.M.

http://www.bnsf.com/employees/communica ... -11-b.html" onclick="window.open(this.href);return false;

Last month, Kinder Morgan Partners

dropped its plans to construct the Freedom pipeline that would have carried crude oil from the Permian basin in Texas to California, as many potential shippers have opted to use railroads over the pipeline.

http://www.forbes.com/sites/greatspecul ... wth-plans/" onclick="window.open(this.href);return false;

I'm not so sure. The lull in Canada they refer to quite possibly sounds like St. John. For the first time in quite a while we have two loaded oil trains running across the Pan Am Railways system through NY, MA, NH and ME right now.