Crude prices are hovering around $30/Bbl making crude–by-rail (CBR) transport an expensive option for hard pressed producers looking to conserve cash – especially where pipeline alternatives are available. The crude price differentials that once justified shipping inland crude to coastal destinations by rail have all but disappeared. In November, 2015 pipeline shipments exceeded rail out of North Dakota for the first time since 2011 and by 2017 available pipeline capacity out of the region should exceed producer’s needs. In the circumstances, rail shipments would appear to be living on borrowed time but as we describe today - some North Dakota rail shipments are continuing in spite of the poor economics.
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 pipelines 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 the Energy Information Administration - 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. After crude oil prices collapsed into the mid-$30s and Congress repealed regulations limiting U.S. crude exports in December 2015, WTI began to trade at a slight premium to Brent that averaged $0.26/Bbl in January 2016. In response to the narrowing spreads - 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. The slow decline in CBR traffic is 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 kick-off a region-by-region CBR round up in North Dakota – where it all began back in 2010.
We’ve covered CBR transport out of the prolific Williston Basin in North Dakota quite extensively in the RBN Blogosphere (our last update was in July 2015 -see The End Of The Line). Back in 2012 Bakken production quickly outstripped available pipeline capacity – much of which had to be shared with crude from Western Canada. The result - that we now look back on as a familiar story in the shale era – was pipeline congestion and price discounting while producers tried to figure out alternative routes to market. As described in our Crude Loves Rock’n’Rail series in the first quarter of 2013 the solution was to build a plethora of CBR load terminals in the Bakken - transforming a famine of pipelines into a feast of rail. As long as the WTI discount to Brent stayed wide enough – rail was an ideal option for Bakken producers – especially to the East and West Coasts where there is no pipeline capacity (see On The Rails Again). When differentials narrowed after 2013 - barrels shifted back to pipelines to take advantage of cheaper tariff rates. Yet significant crude volumes continued to be transported to market from North Dakota by rail because pipeline capacity could not handle the demand.
Today CBR shipments from the Bakken are declining. In November 2015 according to the North Dakota Pipeline Authority (NDPA) - the percentage of crude leaving the Williston Basin by rail was exceeded by the percentage leaving by pipeline for the first time since June 2012. The chart in Figure #1 shows the pattern. The blue line represents an NDPA estimate of the percentage of crude leaving North Dakota by rail since February 2012 (left axis). The red line is the percentage estimated to be leaving by pipeline (left axis). The green shaded area is the estimated monthly crude production in the Williston Basin (right axis). The percentage of crude moving by rail peaked in April 2013 at 75% but since production was increasing rapidly during this period it was not until October 2014 that the most crude was shipped by rail – an estimated 760 Mb/d that month – which represented 60% of total traffic. Rail percentages have been declining since December 2014 except for a brief uptick in September 2015 and they sunk to 41% in November 2015 (the latest data available). Meantime pipeline traffic has been steadily increasing since December 2014 and jumped to 52% of takeaway crude in November 2015. Pipeline shipments out of North Dakota increased steadily during 2015 with the start up of the Kinder Morgan Double H pipeline in February that shipped an average 42 Mb/d during January 2016 according to our friends at Genscape. And along with the decline in rail shipment percentages - overall crude production leveled off after peaking at 1.3 MMb/d in December 2014 (note this production number is for the Williston Basin – including North Dakota, South Dakota and Montana). Since the end of 2014 production has drifted down somewhat but was still only 4% below peak levels in November 2015.