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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Crude oil shippers in the Williston Basin have significantly increased their reliance on railroads over the last year, citing lower costs and greater delivery flexibility compared to traditional pipelines. In fact, several speakers at a recent Oil & Gas conference in Denver proudly said "I love rail." A few years ago, attendees agreed, such a comment would have been hard to imagine.
"As a pipeline guy, I have to say I've never been more depressed in my life," Tad True, vice president of the Belle Fourche and Bridger pipelines, owned by True Oil LLC (Casper, Wyoming), told about 250 attendees at Platts' 7th Annual Rockies Oil & Gas Conference on April 16. Despite a rapid run-up in crude oil production in the Williston Basin, True said their pipeline system volumes have fallen by 44% over the last nine months. "This is not what we want to see."
Click on the images at right to see rising Williston Basin crude oil transportation volumes on railroads and shrinking pipeline utilization.
Today, about 65% of crude oil is moving out of the Williston Basin by rail, and rail's market share continues to grow, True told attendees. Several speakers said the inflection point was last June, when rail-based crude oil shipments out of the Williston Basin exceeded pipeline volumes for the first time.
However, True and other crude oil pipeline companies have joined the trend and are building rail facilities to move crude out of the Williston Basin. The driving force behind rail's ascendency, speakers agreed, was "optionality."
It costs far less--about $8 per barrel less--to transport Williston crude by rail compared to pipeline, speakers told the conference. That gap persists whether the crude is being transported to the West Coast, Gulf Coast or East Coast, speakers said.
And while lower transportation costs give rail transport a significant cost advantage, speakers said crude-by-rail gives producers another important edge: the ability to easily move crude to different markets to take advantage of regional price differences. Those differences recently exceeded $20 per barrel between Bakken Light and both Brent on the East Coast and Louisiana Light & Sweet (LLS) in the Gulf Coast. By contrast, pipelines, the traditional transportation vehicle for crude oil, are less flexible, limited to moving crude along fixed routes from Point A to Point B.
"Rail is winning, and rail will win because flexibility is key," True said.
But rather than fighting the trend, True's company is building a unit-train rail facility in Guernsey, Wyoming, to help move Williston crude to other markets. In fact, rising reliance on rails to move crude oil is a national trend: during the conference, The Wall Street Journal reported U.S. petroleum shipments by rail increased 56.9% year-to-date over year-earlier shipments, citing data from the Association of American Railroads. By contrast, coal shipments fell 7.3% over the comparable period.
Another crude oil transportation company getting into the rail game is Enbridge Incorporated (NYSE:ENB) (Calgary, Alberta). Brad Shamla, Enbridge's vice president of market development, told the conference he was "more optimistic about the future of pipelines than others." But he recognized that "flexibility and optionality are key today," which is why Enbridge recently added a unit-train facility to its Berthold Crude Oil Terminal and Pump Station in Berthold, North Dakota. The unit-train facility adds about 80,000 barrels per day (BBL/d) of outbound crude oil transportation capacity to the Williston Basin. Berthold came online earlier this year. Enbridge is contemplating doubling that facility's capacity. The Berthold facility connects with a railroad mainline operated by Burlington Northern Santa Fe Railway (Fort Worth, Texas), meaning the crude can get to virtually any North American market.
Enbridge's other rail play is the Eddystone Rail Facility, a transshipment facility it is building on the banks on the Delaware River near Philadelphia. When operational by the end of this year, Eddystone can receive up to 80,000 BBL/d of Williston Crude by rail, and then load it onto barges for delivery to one of several Philadelphia-area refineries that process light sweet crude oil, Shamla told the conference. Nearby refineries can process up to 700,000 BBL/d of light sweet crudes. Shamla added that the Eddystone facility could be expanded, if market conditions warranted it.
Its investment in rail projects notwithstanding, Enbridge remains committed to its crude oil pipeline business, Shamla said. The company is spending an estimated $2.4 billion to reverse its Seaway crude oil pipeline and build a twin. These pipelines will bring crude from Cushing, Oklahoma, to the Texas Gulf Coast. In addition, the company stands ready to invest up to $2.8 billion to build the Flanagan pipeline from the Chicago area to Cushing. The proposed pipeline, which would connect with Enbridge's mainline system near Chicago, could have initial capacity of 585,000 BBL/d, and could be expanded to 800,000 BBL/d. The company hopes the initial phase of the Flanagan will be operating by mid-2014.
"Rail provides optionality, and that's why shippers love it," Shamla said. "Rail is in vogue right now. It narrows price differences between regions, and narrower differentials make pipelines look better. We're in the pipeline business for the long haul. If regional crude oil price differentials can be lowered by $10 per barrel, multiply that by rising Williston production over the next 10 years and you create a pretty amazing amount of value."
"It's an amazing turn of events that rail has become the dominant transportation option for getting crude out of the Williston Basin," Industrial Info's Jesus Davis said in an interview. "Two years ago, no one would have predicted that. But surging production has created new market dynamics, forcing people to rethink traditional views about crude oil transportation." Davis, who was not a speaker at the Rockies conference, is Industrial Info's vice president of research for Oil & Gas Production, Transmission and Terminals.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
"As a pipeline guy, I have to say I've never been more depressed in my life," Tad True, vice president of the Belle Fourche and Bridger pipelines, owned by True Oil LLC (Casper, Wyoming), told about 250 attendees at Platts' 7th Annual Rockies Oil & Gas Conference on April 16. Despite a rapid run-up in crude oil production in the Williston Basin, True said their pipeline system volumes have fallen by 44% over the last nine months. "This is not what we want to see."
Click on the images at right to see rising Williston Basin crude oil transportation volumes on railroads and shrinking pipeline utilization.Today, about 65% of crude oil is moving out of the Williston Basin by rail, and rail's market share continues to grow, True told attendees. Several speakers said the inflection point was last June, when rail-based crude oil shipments out of the Williston Basin exceeded pipeline volumes for the first time.
However, True and other crude oil pipeline companies have joined the trend and are building rail facilities to move crude out of the Williston Basin. The driving force behind rail's ascendency, speakers agreed, was "optionality."
It costs far less--about $8 per barrel less--to transport Williston crude by rail compared to pipeline, speakers told the conference. That gap persists whether the crude is being transported to the West Coast, Gulf Coast or East Coast, speakers said.
And while lower transportation costs give rail transport a significant cost advantage, speakers said crude-by-rail gives producers another important edge: the ability to easily move crude to different markets to take advantage of regional price differences. Those differences recently exceeded $20 per barrel between Bakken Light and both Brent on the East Coast and Louisiana Light & Sweet (LLS) in the Gulf Coast. By contrast, pipelines, the traditional transportation vehicle for crude oil, are less flexible, limited to moving crude along fixed routes from Point A to Point B.
"Rail is winning, and rail will win because flexibility is key," True said.
But rather than fighting the trend, True's company is building a unit-train rail facility in Guernsey, Wyoming, to help move Williston crude to other markets. In fact, rising reliance on rails to move crude oil is a national trend: during the conference, The Wall Street Journal reported U.S. petroleum shipments by rail increased 56.9% year-to-date over year-earlier shipments, citing data from the Association of American Railroads. By contrast, coal shipments fell 7.3% over the comparable period.
Another crude oil transportation company getting into the rail game is Enbridge Incorporated (NYSE:ENB) (Calgary, Alberta). Brad Shamla, Enbridge's vice president of market development, told the conference he was "more optimistic about the future of pipelines than others." But he recognized that "flexibility and optionality are key today," which is why Enbridge recently added a unit-train facility to its Berthold Crude Oil Terminal and Pump Station in Berthold, North Dakota. The unit-train facility adds about 80,000 barrels per day (BBL/d) of outbound crude oil transportation capacity to the Williston Basin. Berthold came online earlier this year. Enbridge is contemplating doubling that facility's capacity. The Berthold facility connects with a railroad mainline operated by Burlington Northern Santa Fe Railway (Fort Worth, Texas), meaning the crude can get to virtually any North American market.
Enbridge's other rail play is the Eddystone Rail Facility, a transshipment facility it is building on the banks on the Delaware River near Philadelphia. When operational by the end of this year, Eddystone can receive up to 80,000 BBL/d of Williston Crude by rail, and then load it onto barges for delivery to one of several Philadelphia-area refineries that process light sweet crude oil, Shamla told the conference. Nearby refineries can process up to 700,000 BBL/d of light sweet crudes. Shamla added that the Eddystone facility could be expanded, if market conditions warranted it.
Its investment in rail projects notwithstanding, Enbridge remains committed to its crude oil pipeline business, Shamla said. The company is spending an estimated $2.4 billion to reverse its Seaway crude oil pipeline and build a twin. These pipelines will bring crude from Cushing, Oklahoma, to the Texas Gulf Coast. In addition, the company stands ready to invest up to $2.8 billion to build the Flanagan pipeline from the Chicago area to Cushing. The proposed pipeline, which would connect with Enbridge's mainline system near Chicago, could have initial capacity of 585,000 BBL/d, and could be expanded to 800,000 BBL/d. The company hopes the initial phase of the Flanagan will be operating by mid-2014.
"Rail provides optionality, and that's why shippers love it," Shamla said. "Rail is in vogue right now. It narrows price differences between regions, and narrower differentials make pipelines look better. We're in the pipeline business for the long haul. If regional crude oil price differentials can be lowered by $10 per barrel, multiply that by rising Williston production over the next 10 years and you create a pretty amazing amount of value."
"It's an amazing turn of events that rail has become the dominant transportation option for getting crude out of the Williston Basin," Industrial Info's Jesus Davis said in an interview. "Two years ago, no one would have predicted that. But surging production has created new market dynamics, forcing people to rethink traditional views about crude oil transportation." Davis, who was not a speaker at the Rockies conference, is Industrial Info's vice president of research for Oil & Gas Production, Transmission and Terminals.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
