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Bakken: If Railing Crude is Wrong I Don’t Wanna Be Right

Overbuild!!! The word strikes at the heart of any midstreamer.  Call it the curse of capacity.  There is a shortage of capacity to do something, like transport crude oil, or store natural gas, or process ethane.  You see the opportunity and jump on it, developing infrastructure where it is needed.  But you are not the only smart person out there.  Others jump on the opportunity as well.  And before you know it…. Overbuild!!! Too much capacity has been built and the economics that supported the new infrastructure have been crushed. 

And where do you think the foul word has been used most often lately?  You guessed it.  That island of capacity shortage, the Bakken.   Yes, capacity is still short today.  But there are a lot of projects in the works.  So many pipeline and rail projects out of the Bakken that an overbuild is being predicted by some of the most knowledgeable folks in that market.  In an overcapacity situation it is the high cost alternative that loses out.   And that is rail. 

Note: Watch out natural gas.  Check out contributor Kyle Cooper’s natural gas markets posting this morning on the Markets page - Its’ Baack.  At $2.75 gas prices, coal is regaining market share.

On Thursday of last week at Day #3 of Bentek’s Benposium conference in Houston the seemingly unlikely bearer of this news was Tad True, one of the most knowledgeable players in all things Bakken, VP of the True Companies and scion of the True family businesses which includes pipelines, production, trucking – just about anything related to the crude oil business.  The True family was into Bakken crude way before it was cool.

Tad laid out a model that his team developed along with the North Dakota Industrial Commission to explain and forecast crude oil take away capacity from the Bakken – and then he explained why the model is ‘wrong’.  As you might expect from our title, the model indicates that railing crude is wrong in the sense that much of the rail capacity being built is in excess of what is needed to move crude production out of the region for much of the next decade.  But that’s not right.  Confused?  Let’s look at the model assumptions.

The model presented by Tad assumes that crude oil flows out of the basin will seek the most preferred route, and when that is full go to the next most preferred, when that is full the next, and so on.   (a) In this model the most preferred route is via pipeline to traditional Bakken local markets – Tesoro’s Mandan refinery, the Guernsey hub, and the Clearbrook hub  (for more about Guernsey and Clearbrook see Bakken and a Rollin).  (b) The next most preferred market is via pipeline to non-traditional markets (Cushing, Casper & Salt Lake City).  (c) Next is unit train rail volumes (since unit trains of 80-100 cars are the lowest cost rail alternative.  And finally we have manifest trains – less-cars-than-unit trains.  Manifest rail transportation is both slow and expensive.  In summary this model says that barrels will move on the least cost transportation alternative available.

Tad provided a lot of detail on individual projects that we don’t have time to review here.  But this graphic from his presentation makes the point.  Each project is a “layer” in the stacked area graph, with pipeline projects in green and rail projects in blue.  The black line is the projection of crude oil production.  We’ll talk more about that line later. 

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