North Dakota Bakken Crude Oil

Gilbert B Norman wrote:Yesterday afternoon, I observed a WESTward train passing 18.34 with a consist solely of Tank Cars and with several different ---X reporting marks.

The cars were Red placarded with the HAZMAT (if these 70 year old eyes got it right) identification of "1967"; anybody got their Grazziano handy (I haven't seen one since leaving the industry)?

Could have this train been involved with handling Bakken crude?

Enquiring mind is perplexed; if the train was MTY, which one would think the case moving WW, why was it still placarded?

Oh and finally, the lead C-44 was NS, but I presume that arose simply because NS "owed" BNSF some hp/hrs (horsepower-hours; that was the unit of exchange "back in my day' for "run-through' power).

Most likely was UN 1987 which is a common placard for an Ethanol train.

gokeefe wrote:

Gilbert B Norman wrote:But back on the rails, it will be interesting to see if railroad transportation will continue to be the long-term transport mode, as distinct from "stop gap" until a pipeline is built.

While it has typically been marketed as a "tar sands" pipeline, according to this bulletin from the Montana WatchDog, the Keystone XL actually has plans for spurs that would pickup oil from the Bakken formation in both Montana and North Dakota.

The people at Public Policy Matters make a note about Montana in this 27-page Dec. 12, 2011, report on Keystone XL pipeline by the Congressional Research Survey.
“One point missed in the debate is the construction of two spurs which will use the pipeline for transporting oil from the Bakken formation that underlies parts of North Dakota and Montana,” PPM editors tell readers.

Here is a quick recap of the opening of the Bakken Oil Express facility "just west" of Dickinson, ND. The news of this facility and its initial online throughput of 100,000 BOPT (Barrels of Oil per Train) was the first time I started paying attention to the Bakken at all.

Here an article from PRNewswire via Yahoo! news about the facility's first crude oil unit train.

Dickinson, ND (PRWEB) November 09, 2011
Bakken Oil Express LLC (BOE), is pleased to announce that the first unit train loaded with crude oil at its facility departed via the BNSF Railway, on November 7, and is destined for St. James, Louisiana. Located just west of Dickinson, the BOE Rail Hub has initial take away capacity of 100,000 BOPD and is the first multi-shipper crude by rail unit train facility in North Dakota.
BOE will receive oil by both truck and pipeline. The first train departing included 103 oil tank cars containing approximately 70,000 barrels of oil transported for BOE’s anchor shipper, Eighty-Eight Oil.

One point that the producers will consider, but the outsiders wouldn't even think about is cross-contamination of products in a pipeline. The producers of Canadian Syncrude would love a little contamination of their very heavy crude with the "North Dakota Light Sweet" crude, conversely the North Dakota producers lose value for their product with increasing contamination with the Canadian Syncrude.

BTW - like with coal seams, the Oil in the Williston Basin is produced from different layers of rock. The productive Bakken Shale is the upper layer. Some producers have begun to explore the deeper (and larger) Three Forks Formation and are also finding recoverable oil there.

No Crude Oil moves over BNSF between Galesburg and Chicago on either the former Q or AT&SF, they come down the Barstow Sub from the north, then run via Quincy, IL.

Newest trainload of North Dakota Light is a move via BNSF/NS/CSAO to the former Sunoco refinery at Westville, NJ. An early report suggests that the oil was exported to Germany.

JayBee wrote:Newest trainload of North Dakota Light is a move via BNSF/NS/CSAO to the former Sunoco refinery at Westville, NJ. An early report suggests that the oil was exported to Germany.

I had been expecting that increases in U.S. oil production would lead to lower crude oil prices, resulting in lower distillate product prices as well. For the moment it appears this drop has been delayed until excess refinery capacity has been absorbed by the additional crude oil production.

Once all available refinery capacity has been absorbed the next thing that will happen is whole sale displacement as imports of crude into the U.S. start to go down due to replacement by cheaper domestic production. As crude that would have otherwise been sold to the U.S. goes elsewhere at some point or another there's going to be an increase in supply and a corresponding drop in prices.

gokeefe wrote:

JayBee wrote:Newest trainload of North Dakota Light is a move via BNSF/NS/CSAO to the former Sunoco refinery at Westville, NJ. An early report suggests that the oil was exported to Germany.

I had been expecting that increases in U.S. oil production would lead to lower crude oil prices, resulting in lower distillate product prices as well. For the moment it appears this drop has been delayed until excess refinery capacity has been absorbed by the additional crude oil production.

Once all available refinery capacity has been absorbed the next thing that will happen is whole sale displacement as imports of crude into the U.S. start to go down due to replacement by cheaper domestic production. As crude that would have otherwise been sold to the U.S. goes elsewhere at some point or another there's going to be an increase in supply and a corresponding drop in prices.

Prices will drop when the demand for the collective range of refined oil drops. In the US demand for gasoline is off, but the demand for diesel fuel is very strong. In my part of the country the price of diesel is above $4.10 per gallon, while gasoline is around $3.40.

JayBee wrote:Prices will drop when the demand for the collective range of refined oil drops. In the US demand for gasoline is off, but the demand for diesel fuel is very strong. In my part of the country the price of diesel is above $4.10 per gallon, while gasoline is around $3.40.

Why wouldn't a large increase in supply do the same (eventually)?

gokeefe wrote:

JayBee wrote:Prices will drop when the demand for the collective range of refined oil drops. In the US demand for gasoline is off, but the demand for diesel fuel is very strong. In my part of the country the price of diesel is above $4.10 per gallon, while gasoline is around $3.40.

Why wouldn't a large increase in supply do the same (eventually)?

Isn't the biggest cost factor in the price of a gallon of fuel now state and federal "taxes".?

gokeefe wrote:

JayBee wrote:Prices will drop when the demand for the collective range of refined oil drops. In the US demand for gasoline is off, but the demand for diesel fuel is very strong. In my part of the country the price of diesel is above $4.10 per gallon, while gasoline is around $3.40.

Why wouldn't a large increase in supply do the same (eventually)?

Remember two separate parts to the supply side, Crude Oil Supply, and Refinery Supply. Crude Supply is increasing here, but not Refinery Capacity, if Crude prices drop (probably not until the Iran situation calms down) then Refinery capacity becomes more important.

toolmaker wrote:

gokeefe wrote:

JayBee wrote:Prices will drop when the demand for the collective range of refined oil drops. In the US demand for gasoline is off, but the demand for diesel fuel is very strong. In my part of the country the price of diesel is above $4.10 per gallon, while gasoline is around $3.40.

Why wouldn't a large increase in supply do the same (eventually)?

Isn't the biggest cost factor in the price of a gallon of fuel now state and federal "taxes".?

No, the price of crude oil still comprises most of the price. State and federal taxes are usually less than $0.75/gallon.

Production in the Bakken has now outstripped all available pipeline and rail terminal capacity.

Another rail facility will be coming online this month. Bakken Oil is priced at $71/barrel right now.

From Investors.com, a news website of Investor's Business Daily.

Oil producers in the Bakken shale hit the wall this month as production outstripped pipeline capacity and prices toppled.

Bakken crude priced at Minnesota's Clearbrook terminal dropped 33% year to date to close near $71 a barrel Wednesday. Canadian heavy crude from tar sands staged a similar fall.

Both rebounded Tuesday, after Canadian Natural Resources (CNQ) halted its Horizon oil sands operation. The 110,000-barrel-a-day facility could be offline two to three weeks, offering mild relief to the region's supply glut.
...
Simmons International & Co. on Tuesday forecast some relief for the Bakken congestion in May, when Enbridge (ENB) and Enterprise Products Partners (EPD) will store 2 million to 3 million barrels in a pipeline in preparation for its start-up.

Hess plans to open a 54,000 barrel-per-day rail facility at the end of the month. But Bedard said that addition provides only a short-term fix. "That will fill up pretty quickly," he said, "(The Bakken's) production ramps up fairly quickly to fill any capacity."

Here's an article from the Wall Street Journal (subscription required, or search Google News for a Free Pass), discussing the implications and effects of the Bakken Oil production surge on prices in the crude oil market.

Welcome to Clearbrook, Minn.: America's cheapest gas station.

Want to lay your hands on some oil at just $70 a barrel? Turns out you can. Question is what you will do with it once you own it. Such cheap oil also raises a worrying prospect: America's vaunted progress toward less reliance on energy imports may well get bogged down for want of a pipeline.

This cheap oil isn't the familiar West Texas Intermediate or Brent crude grades. They haven't been at $70 in almost two years. (WTI now hovers around $99 and Brent at $117.)

Instead, this oil is coming out of fields in the Bakken basin underlying North Dakota and Montana, as well as Canada. Much of it flows through pipelines that meet at Clearbrook, a Midwest oil hub like the bigger one at Cushing, Okla. In the past week or so, the price of oil delivered at Clearbrook has plummeted from about $95 a barrel to $70.

As expected the large quantities of new oil are having an effect, however this is limited for the moment due to distribution bottlenecks coming out of North Dakota and Montana.

This equation has another twist:

Increasing production from the Eagle Ford shale formation on the U.S. Gulf Coast, as described in this article from Bloomberg will reduce demand for Bakken produced oil at Gulf Coast refineries.

Eagle Ford crude production in the U.S. Gulf Coast may back out some demand for oil from the Bakken formation in North Dakota, said Tyler Radcliffe, vice president of supply and facilities at Trafigura AG.
“It will have a significant impact on the Bakken in the Gulf going forward,” Radcliffe said during a presentation at the Bakken Product Markets & Takeaway Capacity 2012 conference in Denver. “The Gulf is the logical destination for that Eagle Ford.”

Oil production from North Dakota surged to 510,000 barrels a day in November. Production from the Eagle Ford in Texas was 150,000 barrels a day in 2011 and is projected to climb to 470,000 in 2015, Harold “Skip” York, a Houston-based vice president at Wood Mackenzie Ltd., a research and consulting firm, said Jan. 26.

“This influx of light supply will decrease our need to bring in Bakken with a higher transportation cost,” Radcliffe said. “You will start to see some of that demand backed out, other than the take-or-pay commitments that may be in place on rail.”

Some information I have seen indicated that production companies would have problems once the prices they were getting reached $60/barrel.

Bottom line: There are going to be huge incentives in the near and medium term for railroads to find ways to accomodate movements of Bakken oil from production fields to higher priced markets. Pipeline operators will eventually take up some of this slack but they don't seem likely to be able to do so for quite some time. In the meantime rail will remain the only viable option to immediately move Bakken crude to market. There are currently no indications that the distribution bottleneck is slowing down production. This leads one to believe that producers believe that new capacity distribution capacity coming online (rail and pipeline) will be capable of absorbing current and new production for the foreseeable future.

Once this bulge of new production starts to reach refineries downstream there is going to be a nearly inevitable drop in the cost of gasoline.

Here is an interesting "In Depth" article from National Geographic which discusses gasoline pricing dynamic in the U.S. and why despite higher levels of crude oil production there are expectations that the price of gas will continue to rise at an average annualized rate of 2% for the foreseeable future.

U.S. oil fields yielded an estimated 5.68 million barrels per day in 2011—their highest output since 2003, thanks largely to a surge of new production from shale oil that lies beneath the Great Plains. The rush so far is centered in North Dakota, where oil production has quadrupled since 2005, but drilling is set to spread across the prairie and beyond.
...
But most importantly for U.S. consumers, the new supply is not expected to provide relief at the pump. The price of gasoline, still governed by global geopolitical factors like Middle East conflict, burgeoning economic growth in Asia, and constraints on supply around the globe, is projected to increase at a rate of nearly 2 percent per year. In the United States and elsewhere, the only way to escape the ever-higher price of oil in the future, the experts agree, will be to use less of it.

While, I thought the above posted article from National Geographic was interesting I didn't necessarily agree with it.

The dynamic that was discussed, specifically the effects of Brent Oil on U.S. gasoline prices may or may not continue to hold true depending on production figures from other shale oil plays, several of which are going to be much larger than the Bakken currently is.

I think they correctly identified declining production from conventional fields as a significant piece of the puzzle, however some of that appears likely to be offset by continuing conversions to natural gas. I find it hard to believe that the long term outlook for the low price of natural gas, which wasn't discussed, won't have some effect on domestic demand for crude oil products.

Here is one of the very first published articles I've seen that are starting to hint at predictions of a major depression in crude oil prices inside the U.S.

EVERGREEN, Colo., Feb 15, 2012 (BUSINESS WIRE) -- BENTEK Energy, a leading energy markets information and analytics company, today announced the availability of the PADD 2 (Midwest) section of its Crude Awakening: Shale Boom Hits Oil Market Alert, which forecasts that Midwest crude oil supply will double during the 2011-16 period, growing nearly 808,000 b/d by 2016. BENTEK projects the production growth will include increases of 547,000 b/d in the Williston-ND, 97,000 b/d in the Anadarko and 131,000 b/d in the Utica (Appalachia-OH). Despite these massive supply gains and six currently announced Midwest refinery expansions, crude oil demand from regional refineries is projected to grow only 3% or 108,000 b/d during this time. Transportation projects such as the Seaway and Keystone XL pipelines are expected to provide only temporary relief to ongoing oversupply conditions. Consequently, regional oil prices are projected to remain deeply depressed.

I understand this is really a marketing press release (disseminated via Business Wire) disguised as "news". Nonetheless it's out and they're on the record.

[EDIT: Changed "PR Newswire" "Business Wire", grammar]

The Department of Energy released a report recently discussing issues related to transportation bottlenecks resulting from the production increase in the Bakken Oil Shale fields.

CBS News had an interesting report covering the main points of the report and was one of the few to follow through with the implications for rail:

BISMARCK, N.D. — North Dakota oil production is outpacing the ability to efficiently move the product to market, causing drillers to take deep price cuts at a time when national gasoline prices are on the rise, the U.S. Department of Energy said.

Crude oil from North Dakota's rich Bakken and Three Forks formations has traded at record price discounts in 2012 compared to West Texas Intermediate, the U.S. benchmark, according to the Energy Information Agency, a branch of the Energy Department.

The agency said Bakken crude reached a record price gap of $28 a barrel on Feb. 10. The price discount has thinned in recent weeks but remains well above historic levels, the agency said.

Later on in the article the State Mineral Resources Director for North Dakota is quoted as saying "All of them are seeking more rail capacity to bypass this problem", them being the "10 of the top oil producers" currently in North Dakota.

The New York Times of March 11, 2012, carried an interesting article discussing why in the columnists view gas price disparities were likely to continue unabated:

Global energy markets determine the national trend for oil and gasoline prices, and those markets have been rattled by tensions with Iran. Yet energy markets are also resiliently local, as the patchwork quilt of gasoline prices illustrates. A flood of relatively cheap oil and gasoline is washing through parts of the American heartland, but it’s barely reaching consumers in the rest of the nation.

The latest development in the ongoing saga of the Bakken Oil surge for the railroad industry concerns a fracking company, Preferred Sand, LLC that apparently is bidding on Sunoco's Philadelphia refinery which at (335,000) barrels of oil per day capacity is one of the single largest refineries on the East Coast.

Here is a link to the article from Reuters:

(Reuters) - Preferred Sands LLC, a unit of a privately owned Pennsylvania-based investment firm, is seen as a possible frontrunner to buy Sunoco Inc's (SUN.N) Philadelphia refinery, two sources familiar with the bidding process said on Monday.

As discussions intensify with a handful of varied firms that are said to be considering a bid for the 335,000 barrel per day (bpd) plant, Preferred is working with a group of local pension funds as well as more traditional financiers to put together a deal.

"We made a very substantial bid on the refinery," confirmed Mike O'Neill, founder and chief executive officer of Preferred Unlimited, the parent company when contacted by Reuters.

"We will continue to run it as a refinery and use our substantial logistics experience and leverage our oil industry logistic knowledge."