Rockies Crude and NGL markets: Pipelines, Trains, and Trucks

Yesterday I attended and was a speaker at the Platts 6th Annual Rockies Oil & Gas conference at the Grand Hyatt Denver.  There were about 350 registered attendees, by far the largest of these conferences.  I’ve been a speaker at the event for the past four years.  Good friend and master of ceremonies Stuart Nance (his first day on the job as VP of Bill Barrett Corp.) noted that in previous years the conference was titled Gas and Oil Conference.  Now the order is reversed.  That tells you a lot about the speaker topics and audience interest.  I spoke at 2:15 and was the first to utter the word “gas”.  And I only had 3 slides on the topic.

Over the next couple of weeks we’ll review several of the most important issues discussed at this conference as a multi-part series.  We’ll kick the series off with my own presentation, titled Pipelines, Trains, and Trucks - Infrastructure Booms and Busts?  You can download a pdf of the powerpoint deck at the bottom of this posting. (It is 1.1 MB so may take a minute to download.)  The following are notes that will hopefully make it easier to follow the presentation content.

Note: This posting goes through all 24 slides of my presentation.  Please do not panic and think that we’ll do this for all the other presentations at the conference and so hit the unsubscribe button.  Instead we’ll do a summary of the good presentations and include only a few graphics that are particularly interesting.  And we’ll space these out over 2-3 weeks so you won’t get oversaturated with all things Rockies.

Slide #2 – Presentation outline: (1) Big Picture, (2) Rockies Crude oil - Production up, Capacity constrained, Refineries profitable, Differentials Volatile; (3) Rockies Natural Gas and NGLs - Gas production flat/down, wet and associated gas increasing; Processing capacity and pipeline takeaway capacity increasing; Processing plants profitable, NGL Differentials Volatile

Slide #3 – Production is falling in dry gas plays (in red) while continuing to increase in wet gas plays (in green)

Slide #4 - Crude-to-gas ratio at historic high levels; above 50X

Slide #5 – Rates of return on dry gas plays are very low if not non-existent.  Crude and wet gas plays are highly profitable.

Slide #6 - Crude rig count has increased from 200 in mid-2009 to 1,300 today.  Natural gas rig count has now declined back to 670.

Slide #7 – U.S. crude oil production is expected to increase back to levels last seen in 1988.

Slide #8 – BENTEK projects crude oil production to increase by 2.2 Bcf/d by 2016.

Slide #9 – The most prolific crude oil production area will be the Rockies in four major plays – Bakken, Powder River Basin (PRB), Denver Julesberg (DJ) and Uinta. Note the Niobrara region is composed of the PRB and DJ.

Slide 10 – Crude oil flows in the Rockies generally move in an X pattern.  Crude moves in from the northwest from Canada into the Casper/Guernsey area.  Crude moves out of that area to the Southwest to Salt Lake City and to the Southeast to Midwest refineries and Cushing, OK.  Crude moves into the region from the Bakken (in North Dakota) and other producing areas in Wyoming.

Slide 11 – Increasing production, transportation constraints and other factors have resulted in significant downward pressure on prices at Clearbrook and Guernsey.

Slide 12 – The Brent – WTI differential remains wide, which implies that Bakken and other Rockies crude prices are at a double-discount.  Rockies prices are lower than WTI, and WTI is lower than Brent/LLS.

Slide 13 – Six new pipeline projects will take crude out of the Rockies region or move crude within the region to facilitate additional runs by regional refineries.  Numerous rail terminal projects will also move barrels out of the region, many via unit trains of 100 cars or more..

Slide 14 – Crude oil production in the Rockies is rising faster than pipeline infrastructure can keep up.  Prices in the Rockies region will remain well below WTI.  (The new ONEOK crude line project is not included on this graph).

Slide 15 – Summarizes conclusions of in the crude oil market.

Slide 16 – Rockies natural gas production in PADD IV (Rockies west of N. Dakota) is flat.  N. Dakota production is growing rapidly. 

Slide 17 – About one-third of Bakken gas is getting flared.

Slide 18 – Wet gas and crude oil plays are seeing increases in drilling activity.  Drilling in dry gas plays is declining.

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