Will Soft Crude Oil Prices, New Safety Rules Boost Fortunes of Bakken Pipelines?

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Spectacular industrial accidents can rapidly overturn the fortunes of entire industries. Continued growth in crude oil production in the Bakken Shale, coupled with the virtual certainty that railroads are facing additional safety regulations after a recent string of derailments, accidents and fiery crashes of railcars carrying crude oil, may change the way crude oil is transported out of North Dakota.

"Crude oil production in the Bakken is still rising--official numbers are about 1 million barrels per day (BBL/d), and the numbers are consistently being revised upward," said Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Pipelines and Terminals industries. "At some point, production will level off, but who knows if it will be at 1.2 million BBL/d, 1.4 million BBL/d, 2 million BBL/d or somewhere else?"

"One thing we do know--transporting crude by rail will get more expensive," continued Davis. Recent catastrophic crude-by-rail accidents in North Dakota and Canada, as well as less-catastrophic, though still frightening, rail incidents in Pennsylvania, have created a political environment where new safety regulation of crude-by-rail is no longer a question of if, but when. What is not known is how stringent the new regulations will be, and when they will become effective.

"Pipelines make so much more sense than rail when you're looking at actual transportation costs--it costs about $10 more per barrel to transport crude oil over rails compared to pipelines," Davis said. "When crude oil prices were really high, shippers were willing to pay that premium for the logistical flexibility of sending one unit train of crude to the West Coast one day, and another unit train of crude to the East Coast the next day."

But will shippers continue to pay that transportation premium if Bakken crude oil prices continue to soften? As crude oil is a global commodity, its prices respond to global forces of demand and supply, as well as more local factors like logistics and the processing capabilities of refiners. Although still relatively high by historical standards, Bakken crude oil prices ended 2013 at about $73 per barrel, about where they were 18 months earlier, according to the North Dakota Industrial Commission (Bismarck, North Dakota). In mid-2008, Bakken crude oil hit a historic high of $136.29 per barrel, the commission said.

Click on the icon to see recent average prices for a barrel of Bakken crude oil.

Koch Pipeline Company LP (Wichita, Kansas) recently stopped trying to develop its Dakota Express crude oil pipeline, which would have transported up to 250,000 BBL/d from North Dakota to Illinois. The company announced an "open season" for shippers to indicate their interest in mid-2013, but last month announced that project is no longer being pursued. Company officials declined to say if the project was being placed "on hold," or cancelled altogether. That project was scheduled to be operating by mid-2016.

Another proposed Bakken crude oil pipeline, Bakken Express, was cancelled a year ago by ONEOK Incorporated (NYSE:OKE) (Tulsa, Oklahoma). That $1.8 billion, 1,300-mile project would have transported up to 200,000 BBL/d from North Dakota and Montana to Cushing, Oklahoma. For more on that issue, see January 2, 2013, article-ONEOK Partners Shelves Proposed Bakken Crude Express Pipeline.

On a national basis, the number of railcars used to transport crude oil across Class 1 U.S. railroads has skyrocketed in recent years, according to the Association of American Railroads (AAR) (Washington, D.C.). In 2013, Class 1 railroads transported an estimated 400,000 railcars of crude oil in the U.S., more than 40 times the number of railcars used to transport that commodity in 2008.

Click on the icon to see the dramatic increase in the number of railcars used to transport crude oil across Class 1 railroads in the U.S.

Across the U.S., railroads spilled at least 1.1 million gallons of crude oil last year, more than they spilled in the four-year period from 2009 through 2012. Between 1975 and 2011, U.S. railroads didn't spill a drop of crude oil. For more on this issue, see January 28, 2014, article - U.S. Crude Railcar Derailments Up Dramatically in 2013, but Safety Levels Still on Track.

In the last month, two trains carrying crude oil derailed in Pennsylvania. On January 20, a train owned by CSX Corporation (NYSE:CSX) (Jacksonville, Florida) carrying crude oil jumped its tracks and nearly toppled off a bridge in Philadelphia. On February 13, a Norfolk Southern Corporation (NYSE:NSC) (Norfolk, Virginia) train derailed in an industrial park in western Pennsylvania, spilling a reported 3,000 to 4,000 gallons of its petroleum cargo. The train was carrying crude oil and liquefied petroleum gas (LPG).

No one was hurt in either accident, but they likely will contribute to the drive for tougher safety regulation of rail cars carrying crude oil. The U.S. Senate is scheduled to hold hearings on railcar safety.

Railcars now transport between 67% and 75% of the crude oil out of the Bakken Shale, a dramatic increase over their historic market share. For more on this issue, see May 7, 2013, article - Crude-by-Rail Surges, Dominating Outbound Transportation from Williston Basin.

In turning away from pipelines, shippers say the added cost of moving crude by rail is more than offset by the greater flexibility and shorter lead times compared to pipelines. But changes in railcar safety regulations may add to rails' price disadvantage, while reducing railroads' logistical flexibility in moving crude oil.

"Building a pipeline to transport crude oil is an expensive proposition, but we're seeing some creative arrangements that are helping projects move forward," Davis said. Marathon Petroleum Corporation (NYSE:MPC) (Findlay, Ohio) recently became an investor and anchor shipper on the $2.6 billion, 620-mile Sandpiper Pipeline Project, which is being developed by Enbridge Corporation (NYSE:ENB) (Toronto, Ontario) to move crude oil from the Bakken to the Midwest and Eastern Canada. For more on that project, see January 14, 2014, article- Sandpiper Crude Oil Pipeline Project Gains Major Investor and Anchor Shipper.

Further, Davis said that industrial projects are often revived after being placed on hold or even cancelled: "I'm not saying the Dakota Express or Bakken Express projects are going to become reactivated, or that some new Bakken-area crude-oil pipeline will be announced. But market conditions change and project developers find ways of moving with the market. Rails were supposed to be the short-term answer to getting crude oil out of the Bakken. But the short-term has stretched into the medium-term. Given heavier safety regulation of railcars, we wouldn't be surprised to see increased pipeline project activity in the Bakken."

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