The price differential between Brent crude and West Texas Intermediation, also known as the Brent/WTI spread, widened from approximately $5 in early October to approximately $15 in mid-November, and Williston Basin crude oil export dynamics responded accordingly.
As the Brent/WTI spread narrowed through the spring and into the summer of 2013, pipelines reversed a 13-month trend and began taking back Williston Basin export market share in April, a trend that continued through August when pipelines accounted for 31 percent of basin exports and rail accounted for 61 percent. But after hitting parity in July, the Brent/WTI spread began widening again, and in September, Williston Basin crude exports responded with railroads winning back some market share increasing rail exports 2 percent from 61 to 63 percent (see charts).
The shift of some export share back to rail came as no surprise to Pipeline Authority Director Justin Kringstad, who said in a Nov. 15 press conference that the shift “was to be expected when we looked at what was happening with crude oil prices both in the Mid-Continent and the Brent or world oil price.”
Kringstad said that with Brent/WTI spread again widening, rail exports will probably increase over the next several months because “we’re seeing the prices in the region are depressed relative to what they can realize on those coastal oil markets.” Those price differentials, he said, will be “driving those barrels back towards those rail destinations on the East Coast and West Coast.”
North Dakota Department of Minerals Management Director Lynn Helms said he has not heard what he considers a “really good explanation” as to why the sweet crude prices have fallen so much in recent months, but he knows there have been constraints on light sweet refining capacity in the Mid-Continent area.
Regardless, Helms agrees that rail exports are likely to increase and notes that Brent prices have not fallen to the extent that WTI and Mid-Continent North Dakota sweet crude prices, and the stronger Brent pricing is “going to drive a lot more oil into rail cars because you haven’t seen the same kind of fallout in Brent price,” he said in the Nov. 5 press conference. “So this is going to push more oil faster to the east and west coasts.”
Depressed Mid-Con prices
Although the Brent/WTI spread has been widening in recent months, it is not so much a function of the Brent price rising as it is a function of the WTI price falling. Between early September and mid-November, the per barrel price of Brent fell just over $7 from $115.68 to $108.50, while the WTI price fell over twice that amount from $108.54 to $93.84, a difference of $14.70 (see chart).
Another coastal crude index besides Brent is Alaska North Slope crude, which has seen a larger differential than Brent. On Sept. 3, Alaska North Slope closed at $113.88 per barrel and on Nov. 15 it closed at $102, a difference of $11.88.
Even more glaring is the price of North Dakota sweet crude. Not only has it historically traded at a discount relative to the other three crude oils, but it has seen a much more pronounced decline in recent months (see chart). On Sept. 1, North Dakota sweet was trading at $95 per barrel on the Flint Hills Resources market and on Nov. 15 it closed at $70.50, a difference of $24.50 per barrel. The price experienced a one-day tumble of more than $8 between Oct. 31 and Nov. 1 on the Flint Hills market.
North Dakota insulated
The lower sweet crude prices have not had a noticeable effect on oil development in North Dakota according to Helms, although he said that could change in the future. He said North Dakota was insulated from crude oil price fluctuations in recent years, i.e., in 2010 through 2012. Helms said North Dakota was “almost completely decoupled from oil price during those years, and for the most part I think we still are.” He said one advantage that North Dakota operators have in times of fluctuating oil prices is the rail option. Rail cars, he said, “really give us the ability to move this oil where the money is.”
Helms believes all of North Dakota’s 22 rail loading facilities have additional capacity “on top of the fact that there are more rail facilities in the design phase.” He noted that ground was just broken on Thunder Butte refinery on the Fort Berthold reservation (see related story on page 3), and “not surprising,” he said, “the very first thing they are going to build is a rail facility.”
Rail, however, is not without its share of problems. In the wake of recent derailments, a push is on to tighten rail car safety (see related story on page 1).
Below the sweet spot
The falling crude oil prices, Helms said, are always a concern to operators and North Dakota crude is now priced below what he says industry has always considered the “sweet spot,” which he says is in the range of $80 to $85 per barrel. “And so there is a concern there and that’s going to impact how they bring these wells on and how hard they produce them when they initially bring them on — they may even choke them back a little bit and not flow wells at 5,000 barrels a day.”
But Helms said even though current North Dakota crude prices are below this “sweet spot,” the prices are still well above what is generally considered to be the breakeven price. He recently looked at the latest 12-month production data per county, and said that “if you look at the four biggest counties where most of the rigs are, they all have a breakeven oil price of $45 a barrel or less, so there’s a long ways to go before Williams, Mountain, McKenzie and Dunn counties pull the reins in and really decrease activity.”
In February 2012, the first month for which export data are available from the North Dakota Pipeline Authority, pipelines accounted for 56 percent of basin exports with railroads exporting 28 percent of basin crude. Of the remaining 16 percent, 10 percent went to Tesoro’s Mandan refinery and 6 percent was transported on tank trucks to Canadian pipelines. In September, 62 percent of oil left the basin on rail cars and 29 percent went through pipelines. Solid numbers on exports to Canada are not currently available, but the Pipeline Authority estimates that 1percent of Williston Basin crude went to Canada in September and 7 percent went to the Tesoro refinery.
