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Vol. 18, No. 29 Week of July 21, 2013
Providing coverage of Bakken oil and gas

Rail exports fall

Pipelines gain back some market share as Brent-WTI price spread shrinks

Mike Ellerd

For Petroleum News Bakken

Railroad’s market share of Williston Basin crude oil exports fell by 6 percent in May 2013, the first decline in rail’s share of the export market since August 2012, and all that market share went back to pipelines. Those figures were presented by North Dakota Pipeline Authority Director Justin Kringstad during a July 15 joint press conference with the Oil and Gas Division of the North Dakota Industrial Commission’s Department of Mineral Resources in Bismarck.

In May, railroads accounted for 69 percent of crude oil exports from the Williston Basin, down from a record high market share of 75 percent that went to railroads in April. Picking up that 6 percent market share pushed pipeline exports from the basin to 23 percent in May, up from the 17 percent share pipelines held in April.

In terms of actual volumes, railroads transported an estimated average of 638,075 barrels of crude out of the Williston Basin in May, a decrease of 37,698 barrels from the average of 675,773 barrels shipped via rail in April. Unchanged from April were the 7 percent of Williston Basin crude oil that went to the Tesoro refinery in Mandan, and the 1 percent that was shipped via truck transport across the U.S. border to Canadian pipelines.

Why the shift?

The primary driver behind the high export market share that railroads have been experiencing is the price difference between Brent crude oil and West Texas Intermediate, also known as the Brent/WTI spread. For several years Brent crude has been selling at higher prices on the coastal markets than what WTI has been bringing at Mid-Continent markets. Railroads, having better access to the coastal markets, have been the preferred shipping method for many Williston Basin producers in order to access the premium markets on the east and west coasts as well as the Gulf Coast.

Rail transport is, however, typically more expensive than pipeline transport, and that premium can be in the range of several dollars per barrel, depending on contracts. So the price which operators get for their crude oil on the coastal markets, i.e., in the Brent price range, has to be high enough to justify the higher cost to ship on railroads to those markets, as opposed to shipping via pipelines to Mid-Continent markets and fetching prices in the WTI price range. Kringstad reported the Brent/WTI spread had narrowed down to $3.12 per barrel on July 15, the day of his press conference. That is a drop of more than $20 per barrel in the spread reported as recently as February. A spread that narrow begins to weigh against the additional costs that shippers pay to transport their crude by rail to coastal refining markets, allowing pipelines to gain back some competitive edge. As a result, a partial shift in exports back to pipelines has emerged in the Williston Basin.

“If you do have the flexibility to either move a barrel of oil by pipe or by rail, you have to take a look at what the destination pricing is and what it’s going to cost you to get it to that destination,” Kringstad said in the July 15 press conference. The May transportation numbers do indicate that as the Brent/WTI spread narrowed, more crude was put back into pipelines and sent to Mid-Continent markets.

However, without railroads there would be no options for North Dakota shippers. Lynn Helms, director of the Oil and Gas Division, says North Dakota is “extremely dependent” on rail transportation, adding that continued shipment of crude oil by rail is critical to the ongoing development and production growth in North Dakota. “Without it, price differentials and lower prices would have a big negative impact on what’s happening in the Bakken and Three Forks. So we’re very dependent on it and very closely watching the situation.”

Will the trend continue?

One of the reasons the Brent-WTI spread has narrowed in recent months, Kringstad said, is that new pipeline configurations in the Mid-Continent, such as the Seaway Pipeline, are allowing more crude shipments to bypass the Cushing, Okla., Mid-Continent hub and reach Gulf Coast refining markets. If the Brent/WTI spread remains in the $3 to $5 dollar per barrel range, which is the approximate range where the 6 percent shift from rail to pipeline occurred in May, Kringstad believes the shift away from rail and back to pipelines could continue in coming months.

The ultimate question, though, is whether the Brent/WTI spread will remain tight in the longer term. Even though the spread has been narrowing, Kringstad said many analysts are anticipating a widening in the spread toward the end of 2013 and even into 2014.

In addition, Kringstad said there is some concern among analysts as to whether the new pipeline capacity to the Gulf Coast will be able to keep pace with growing crude oil supplies in North Dakota and Alberta which “funnel” into the Mid-Continent region of the U.S. So exactly how the dynamic between rail and pipeline exports in the Williston Basin plays in coming months remains to be seen.

Overall export capacity

Even though crude oil production in North Dakota continues to expand, Kringstad said he believes the state will have the necessary transportation capacity to meet the needs of the continually growing production. North Dakota has seen significant gains in crude oil pipeline capacity and more pipelines and pipeline expansion projects are planned. There are also currently 22 existing rail loading facilities in the state.

“The combination of our pipeline system, existing pipe and expansions that are upcoming and new pipeline projects, coupled with our rail capabilities, we should have adequate means of moving oil to market,” Kringstad said. The issue, he continued, will be moving the oil to the right markets. “Now the question is determining which market and what type of market pricing, and how do we get North Dakota oil to the right market at the right price.”



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