According to the latest Energy Information Administration (EIA) monthly Drilling Productivity Report, crude production from the Niobrara shale in Colorado and Wyoming peaked at 491 Mb/d in April 2015 and is forecast to decline by ~100 Mb/d to 388 Mb/d through March 2016 – in response to falling crude prices and lower drilling activity. Meantime midstream companies are still building new pipeline capacity out of the region with the Saddlehorn and Grand Mesa projects set to add 350 Mb/d of takeaway capacity this year (2016). The pipeline build out has already caused a shift of crude shipments away from crude-by-rail (CBR) that peaked in December 2014. Yet as we describe today - rail terminals and infrastructure are still under construction in the region.
In Part 1 of this series we noted that CBR volumes are falling across the U.S. and Canada. The decline is mostly in response to narrower spreads between U.S. domestic crude benchmark West Texas Intermediate (WTI) and international equivalent Brent. The lower the spread between these two, the lower the incentive to move crude from inland basins to coastal refineries by rail because the latter is a more expensive transport option compared to pipelines. When WTI was discounted to Brent by upwards of $25/Bbl in 2011 and 2012 because of congestion caused by a lack of pipeline capacity, it made sense to use rail to get stranded crude to market. We described the resulting increase in U.S. CBR shipments from 33 Mb/d in January 2010 to a peak of 928 Mb/d in October 2014 (according to EIA). As new pipelines have been built out to provide less expensive options to get stranded crude to market so the WTI discount has narrowed and CBR traffic has declined. After crude oil prices collapsed into the mid-$30s and Congress repealed regulations limiting U.S. crude exports in December 2015, WTI began to trade at a slight premium to Brent that averaged $0.26/Bbl in January 2016. Primarily in response to the narrowing spread - CBR volumes fell during 2015 but not as fast as you might expect – dropping only 20% between January and November 2015 (latest EIA data) even though the economics often made no sense. As we discussed in Part 2 – looking at the epicenter of the CBR boom in North Dakota – the slower than expected decline in rail shipments is mostly because committed shippers and refiners continued to use rail infrastructure that they invested in and because some routes still do not have pipeline access. This time we look at CBR traffic out of the Niobrara shale region in the Rockies.
We last looked at CBR movements out of the Rockies in April 2015 (see A Look At The Rail Track Record). Rockies crude from shale comes primarily from the Niobrara formation with drilling focused in the Wyoming Powder River Basin (PRB) and Colorado Denver Julesburg (DJ) Basin (see Bananarama in the Rockies). The best publically available information about CBR shipments out of the Rockies comes from the EIA monthly rail movements report. The EIA reporting region that encompasses the DJ is Petroleum Administration District for Defense (PADD) IV – consisting of Montana, Wyoming, Colorado, Utah and Idaho. The shaded areas on the chart in Figure #1 show EIA estimates for CBR movements from PADD IV to other regions of the U.S. and Canada in Mb/d against the left axis between January 2013 and November 2015 (latest data). In the two years from January 2013 to December 2014 total CBR shipments out of PADD IV grew 8 fold from 12 Mb/d to 176 Mb/d – picking up significantly during 4Q 2013. Since January 2015 CBR overall volumes out of PADD IV have declined by about 30% to 123 Mb/d in November 2015. The take off in Rockies CBR coincided closely with growing crude production in the region. The orange line on the chart (against the right axis) represents monthly EIA Drilling Productivity Report Niobrara crude production estimates. Production doubled from 228 Mb/d in January 2013 to 452 Mb/d in December 2014 then continued to increase to peak at 491 Mb/d in April 2015 – falling off by 10% since then to 452 Mb/d in November 2015.