North Dakota's Bakken Shale Oil in Search of New Markets

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Researched by Industrial Info Resources (Sugar Land, Texas)--Initially lauded as a beacon of an energy-independent North America, the Bakken shale play has lost much of its luster in the wake of plummeting oil prices and its geographic isolation. Thanks to competing light-oil plays closer to the Gulf Coast refining hub, Bakken crude is finding more marketability with refiners on the East and West coasts. As a result, shipping by rail is the preferred method of delivery.

While drilling in the shale continues, it is more a matter of needing to drill it before someone else does, than any excess of profit being gleaned from the play. Demand for light, sweet crude oil is not as high as the Bakken's supply potential. Thus, Bakken producers must either create new demand by refining locally, or take a risk and shift their target market north to Canada.

Its isolation, combined with the hydraulic-fracturing technology used in extracting the Bakken's oil, make its breakeven price higher than both conventional plays and other fracking plays in the U.S., due to the need to move it long distances to market. Railcars and pipelines are the favored methods of moving crude over long distances, with railcars running east-west, and pipelines running north-south. While pipelines are the most efficient way to transport crude oil, they require substantial initial investment, and producers must pay tolls based on the miles traveled. Given its geographic isolation, North Dakota producers would have to pay premium rates to ship via pipeline to the Gulf Coast.

Gulf Coast refiners are equipped to handle imported OPEC crude, which is heavy and sour, not light, sweet Bakken crude. Likewise, Midwest refiners haven't traditionally handled light, sweet crude oil. North Dakota is in the process of building some of the first new U.S. refineries in years to make use of the Bakken's brand of crude and refine it locally into diesel for tanker trucks and other industries. While the scale of the proposed and under-construction refineries, such as Thunder Butte Refinery Services' (Makoti, North Dakota) planned 20,000-barrel-per-day refinery, is relatively small, it enables the local Oil & Gas Industry to maintain a degree of autonomy and offer an unconventional opportunity.

The Canadian oil sands produce thick, viscous bitumen that must be diluted to be transported via pipeline. Bitumen uses light hydrocarbons, called condensate, as diluents. These diluents are sourced from liquids-rich shale plays in the U.S. as far south as the Eagle Ford Shale in Texas. While the dividing line between light crude oil and condensate is hazy, once the crude oil is processed to a certain degree, it can be exported as a refined product. If the refineries that are planned in North Dakota are only taking diesel from the hydrocarbon mix of Bakken crude, it may be possible for refiners to then ship the remaining lighter hydrocarbons, such as natural gasoline and pentane, north to Canada and on to Alberta for use in oil sands shipping.

Another possibility would be to ship Bakken crude directly to Canada, pending a lifting of the U.S. crude export ban, or following a degree of processing at the local refineries. TransCanada Corporation's (NYSE:TRP) (Calgary, Alberta) Energy East Pipeline project would ship more than 1.1 million barrels per day of Alberta bitumen to Quebec refiners and to St. John, New Brunswick, to be exported. If Bakken producers can connect to this line via pipe or truck, they may reach two markets that would provide them with increased demand for their product.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, 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.