Crude Loves Rock’n’Rail – Brent, WTI and the Impact on Bakken Netbacks

Last week (April 29, 2013) the economics of crude-by-rail began to get real interesting as the differentials between inland crudes priced against West Texas Intermediate (WTI) and coastal crudes priced against Brent narrowed to less than $9/Bbl. The Brent/WTI differential traded at about $17/Bbl on average during 2012 and helped to justify the expansion of crude by rail to allow producers to reach higher priced coastal markets. Now the spread is less than the cost of rail transport from the Bakken to the East Coast. Today we delve into the costs of rail transportation and build a netback comparison for Bakken producers.

Previously on Crude Loves Rock’n’Rail…

The first episode in this crude by rail series provides an introduction and overview of the “Year of the Tank Car” (see Crude Loves Rocking Rail). We describe the rapid growth in US crude oil production that put pressure on pipeline logistics and made rail a viable alternative for moving crude to market. The second installment (see Crude Loves Rocking Rail – The Bakken Terminals) began our survey of rail loading terminals with a map and a complete list of facilities in North Dakota.  The follow up episodes covered EOG, Hess and Inergy, Plains, Enbridge and Global, Bakken Oil Express, Dakota Plains, BakkenLink and Savage and Bakken terminals north of the Canadian border in A Plethora of Terminals in the Williston Basin. We discussed the development of rail terminals loading heavy oil sands bitumen crude in Western Canada in two episodes Heat It! (Bitumen Economics Part 1) and Part 2. The last episode on rail loading covered terminals built outside the Bakken and Canada in the Niobrara, Eagle Ford, Permian and Anadarko basins as well as Cushing, OK (see Load Terminal Craze). Next we surveyed rail destination terminals covering the East (see East Coast Delivery Terminals) West (see West Coast Destinations) Eastern (see The Bakken St James Shuttle) and Western Gulf Coasts (see Houston Ship Channel and Outside the Ship Channel respectively.

In this episode we look more closely at the economics of crude by rail transport and then provide a comparison map to show how a Bakken producer would reckon the destination and mode of transport that gives them the best return or “netback”. The costs that we are using have all been extracted from company presentations or published information and are based on North Dakota producer experience. Obviously individual company costs vary with circumstance. We start with a look at the first transport cost – from the wellhead to the terminal (with the terminal being located at either a railroad or pipeline).

Wellhead to Terminal Gathering System

This is either a trucking fee or a pipeline gathering system fee. North Dakota Pipeline Authority September 2012 estimates indicated that 64 percent of crude gathering was by truck and only 36 percent by pipeline. A gathering pipeline is typically less expensive than using trucks. Trucking companies typically charge a fee that varies with the miles travelled plus wait time. Our rule of thumb estimates of typical trucking fees are $3/Bbl and typical gathering pipeline fees are $2/Bbl.

Rail terminal owners charge a throughput fee with additional costs for storage. Different unloading fees apply for trucks and pipelines. Shippers usually negotiate two-year minimum contracts with rail terminal operators based on a committed volume of crude. The contract will be “take-or-pay” meaning that the shipper has to pay regardless of whether they throughput the crude. Additional barrels may be throughput on a “walk-up” basis but these will be more expensive. Our rule of thumb estimate of throughput fee is $2/Bbl. Terminal fees also apply at the destination rail terminal.

Additional throughput fees apply if the journey to market involves rail to barge. The shipper has to pay a fee to the barge terminal operator to transload crude from railcars to barges and then further offloading fees from the barge at final destination.

Rail Freight

Following are typical crude-by-rail transport cost factors:

Freight costs: (per tank car) based on journey from load to destination terminal. The freight cost varies by railroad, route, commodity and destination. You can get estimates online from the Class 1 railroads although they generally require you to register before providing prices. The published price is negotiable depending on shipping volumes. Manifest railcars are more expensive to ship than unit trains of 100 railcars or more (see A Tank Car Train For Hire). A typical rail tank car carries 660 Bbl of light sweet crude and about 500 Bbl of bitumen crude (see Heat It!). Switching fees may also apply if the journey involves more than one railroad.

Fuel Surcharge: railroads may include a fuel surcharge that has to be added to the freight cost. The fuel surcharge reflects unexpected increases in the price of diesel to power the locomotives.

Tank car lease: some shippers own rail tank cars, most lease them. Lease rates have increased significantly as crude-by-rail has taken off. There is a shortage of rail tank cars compared to rapidly growing demand. The backlog of new orders is nearly 2 years. A tank car lease is a monthly $ amount that you pay whether or not the rail tank car moves anywhere. The monthly cost on a new lease is currently between $2,000 and $3,000. Older leases are out there at prices below $1,000/month for a few lucky early adopters. The lease cost should be prorated by journey time to arrive at a $/Bbl number. For example if you are able to make two roundtrip journeys between the Bakken and St James in one month (two weeks per leg) then the lease cost per barrel is calculated as follows:

            Lease Cost/month:                         ~$2,640

            # of trips/month                                    2

            Bbl/Tank Car                                    660

            Lease cost/Bbl = $2,640 / 660 = $4/Bbl divided by 2 trips = $2/Bbl

Crude shrinkage cost: approximately 1 percent of the crude oil may evaporate from the tank car during the journey. The volume loss is 1% of 660Bbl. If the crude price is ~$90/Bbl the loss would be 6.6 * 90 = $594 per tank car or ~ $1/Bbl

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