Sandy Fielden, RBN Energy
Last week the latest set of Bakken crude production numbers showed another big increase to reach 728 Mb/d. The challenge all along for this prolific land locked basin has been one of finding a ready market for growing production. Meeting that challenge in the absence of quickly available pipeline capacity led to creative solutions and many new destinations. Today we contemplate what they are going to do with all that crude.
This new record production level for September 2012 is up another 27 Mb/d over August. North Dakota now accounts for nearly 12 percent of total U.S. crude production, up from 1 percent less than five years ago. RBN Energy blog readers will be familiar with the reasons behind these production statistics. We recently covered overall US production increases from shale oil in the big three plays – the Bakken, Permian and Eagle Ford basins (see Will the Crude Production Boom Keep Running?). The charts below show the pace of Bakken crude production since the start of 2008. [The data is for North Dakota but remember that there is also Bakken production in Montana (~50 Mb/d) and South Dakota (~5Mb/d)]. The chart on the left shows actual monthly production in Mb/d. We added a trend projection (red dotted line) to the same chart on the right – following the period of most rapid growth from July 2011 and projecting forward until production hit 1 MMb/d during the 4th quarter of 2013.
Source: North Dakota Industrial Commission Production data – RBN Energy Trend Projection
Given record crude production and projected continued increases to over 1 MMb/d by the end of 2013, the big concern for producers’ remains where to find the best home for all that crude.
Back in January constrained pipeline capacity had producers wringing their hands at discounted crude prices (see Bakken Buck Starts Here Part III) and wondering how their crude would even get to market. Just nine months later in September we had seen a significant build out of new rail loading facilities and discovered that this previously out of fashion mode of oil transport could successfully plug the gap left by lengthy pipeline project lead times. As a result the Bakken discounts to WTI evaporated (see Railing Against the Pipelines). With 18 rail terminals of various sizes and capabilities now operating in the North Dakota Bakken production area, the logistics challenge to find routes to market has come full circle from a famine of pipelines to a feast of rail. Looking ahead to the end of 2013 when we hit that 1 MMb/d production mark, takeaway capacity by pipeline should be over 600 Mb/d and rail capacity will be over 700 Mb/d – a total of 1.3 MMb/d – enough to handle surging production at least until 2014.
As far as destinations for Bakken crude go, the number of options has broadened with all the rail terminals. One of the most impressive consequences of this year’s effort to get increasing crude production out of landlocked North Dakota is the number and variety of routes and destinations that ingenious marketers are devising to accomplish the task. Here’s a list (by no means exhaustive) that we have come across in our research:
- Pipeline – the two main routes out of North Dakota – via Clearbrook, MN to Flanagan IL and on to Cushing, OK or via Guernsey to Wood River IL.
- North across the border to Canada and then over to the East Coast of Canada – destination the Irving St John refinery in New Brunswick (Statoil are delivering up to 70 Mb/d)
- South to Cushing, OK (with Cushing prices still in the dog house, no longer a popular option)
- South to the Louisiana Gulf Coast and one of the new terminals at St James, LA (Nustar, US Development)
- South to the Texas Gulf Coast at Houston or to the Savage Port Arthur Crude Terminal (PACT)
- West to Washington State – the Tesoro Anacortes and Phillips 66 Ferndale refineries
- West to California – the US Development rail terminal at Bakersfield
- Rail to Albany, NY then onto barges for destinations along the East Coast
- Sunoco Eagle Point Terminal near to the Phillips 66 Bayway refinery
- Camden, NJ Hess terminal to deliver to the Hess Woodbridge refinery
- The Nustar terminal at Paulsboro NJ for delivery to the PBF Paulsboro refinery
- Philadelphia Sunoco/Carlyle (rail receipt terminal in construction)
- Plains All American Yorktown, PA terminal on the Chesapeake Bay
- Rail to the Midwest and then by Barge to the Gulf Coast via
- St Louis, MO terminal operated by Kirby Corporation
- Hennepin, IL and Hayti, MO terminals operated by Marque
- Port Catoosa near Tulsa, OK terminal (High Plains)
- Rail and Pipeline
- South by rail to St James, LA then north via the Capline pipeline to the Valero Memphis refinery
That impressive list of available routes for Bakken crude to get to a refinery gate illustrates a new crude logistics paradigm. That new paradigm is less dependent on pipeline infrastructure and more flexible to delivering to the best-priced destination. Understanding pipeline, rail and barge logistics and knowing the best options to reach different locations is where the future of domestic crude oil distribution lies – at least for Bakken crude producers.
That’s not to say that pipelines are over and done with. Far from it – there will always be a place for crude oil transportation by pipeline - but only where it makes sense over the long term. The challenge for the domestic US oil industry today is that “long-term” turns out to be a lot further off than anyone thought possible. Production is growing faster than pipeline infrastructure can keep up. Case in point – lets say you plan and build a pipeline over thousands of miles from Canada to the US Gulf Coast (think Keystone). You have to be concerned that by the time the pipeline is built and crude is flowing, the world of oil production could be completely changed. That has already happened to Keystone in the form of huge new shale and conventional production from two big fields in Texas – the Permian and Eagle Ford – that are in the process of changing market dynamics at the Gulf. Keystone will still go ahead – but you can bet that the spreadsheets the planners put together when the scheme was on the drawing board will have a bunch of pretty dusty assumptions in them. US natural gas pipeline planners ran into the same problem with projects like the REX pipeline that delivered stranded Rockies gas into a market about to be saturated with local Marcellus production.
Those Bakken crude producers lucky enough to get their barrels shipped on limited pipeline capacity out of North Dakota found their route to market constrained by oversupply in the Midwest during the past two years. There is every indication now that even if the Cushing logjam ends in 2013 it may well just migrate to the Gulf Coast (see Oh-Ho-Ho its Magic – Will Gulf Coast Crude Flow Smoothly). New North Dakota pipeline capacity coming online over the next two years was mostly designed to deliver more Bakken crude to the Gulf Coast – where it will compete with a large influx of similar quality barrels from the Permian and Eagle Ford basins in Texas. Bottom line, it has become quite clear that the better destinations for Bakken crude going forward will be the East and West Coasts and not the competitive pipeline routes to the Gulf.
These two coastal markets currently each import about 1 MMb/d of crude to balance their refinery requirements. That is 2 MMb/d of crude market share up for grabs. Declining ANS crude production is also creating more demand for domestic crude on the West Coast. The East and West coasts are paying higher prices for their crude based on the international Brent benchmark. Bakken crude can therefore compete with those foreign imports on price. Higher cost Bakken transport options into these markets (rail and barge) are bearable because there is no pipeline competition (unlike the Gulf Coast). All of that makes the East and West coast markets the ideal destination for Bakken crude.
The rate of change in the US energy industry is so rapid nowadays that in the space of a year we saw a transformation in crude oil delivery logistics. Bakken producers started out going down the well-trodden path of pipeline delivery to the traditional market center at Cushing. When that proved difficult and with new production increasing the pressure at their backs all the time, marketers rapidly developed alternative destinations by rail and barge. Now the consensus is that far from being a stopgap, those routes will offer the best option to reach East and West coast destinations where Bakken crude is best positioned to compete. We will return to look more closely at the transport options and costs for Bakken crude in later blogs in this series.
About the author
Sandy Fielden serves as Director Energy Analytics for RBN Energy LLC and is an internationally accomplished professional with 25 years of management and communication experience in the European and North American energy industry, including ten years as a vice president at industry leading firms. He is a widely recognized expert at analyzing, processing, and communicating the value of a wide range of information in the energy industry.