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The Bakken Buck Starts Here – Bakken Crude Pricing Part III

 

Bakken crude oil has traded at an $8-$10/Bbl discount to WTI for the past few weeks, and a few times since January this year has  blown out to more than $20/Bbl.  We talked about some of the reasons for this volatility in the first two installments of “The Bakken Buck Starts Here”, covering the mysteries of crude postings and pipeline hub pricing. Ultimately however refiners are more concerned with delivered crude oil prices. Today’s installment of The Bakken Buck Starts Here – Bakken Crude Pricing Part III compares delivered crude costs to four US refining centers.

To recap our series so far: The Bakken Buck Starts Here- Bakken Crude Pricing Part I uncovered the mysteries of crude postings and gravity adjustments. Part II looked into pipeline hub pricing at Clearbrook MN and compared those prices to the crude postings available in North Dakota. If you are new to this series, you might want to catch up by reading those blogs first. Today in Part III – we estimate relative transport costs to deliver Bakken crude to US refining centers in the Midwest, Houston, St James LA, and the East Coast.

There are three options to move crude oil out of the Bakken – trucks, trains and pipelines (although as we shall see, if you travel far enough you hit water and can bring barges into the mix). We are not going to say much here about trucks except to factor in their cost when shippers use them to deliver to pipeline or rail receipt points. Pipelines are the least expensive way to transport crude but permitting, right-of-way approval and construction take a long time and they cost a lot to build. Building receipt and delivery rail infrastructure is less expensive than pipelines and the North American rail system is flexible enough to allow connection to virtually any destination.  As we learned in (Bakken: if Railing Crude is Wrong I Don’t Wanna Be Right) there are numerous train expansions being planned to rail crude out from the Bakken and many of these will survive subsequent pipeline expansion because of their flexibility and long-term contractual commitments.

The analysis that follows is based on publically available cost estimates and assumptions that we have made to provide an indication of how Bakken crude delivery costs to four refining centers compare. In reality, transportation costs are negotiable and factors such as volume and term play an important part. The purpose of the examples here is to show how delivery costs change crude price dynamics the further you get from the wellhead.

Pipeline to the Gulf Coast

As we discovered in Part II, if they are lucky enough to have shipping capacity, companies producing or gathering larger crude volumes in the Bakken Shale can deliver their barrels to the pipeline hub trading markets at Clearbrook MN or Guernsey WY (for map see A Perfect Storm) for onward shipment to Cushing, OK, the midcontinent, the Rockies and the Gulf Coast. We also learned that these pipelines are full to capacity and that Bakken crudes compete with Canadian barrels for any spare room available. Nevertheless, we’re going to estimate two pipeline costs - from Clearbrook to the Gulf Coast and from Guernsey to the Midwest (Wood River, IL) just to indicate the delivered costs to these locations if you are lucky enough to find space on the pipeline.

We learned in Part II that gathering costs from the Bakken to Clearbrook via the Enbridge North Dakota pipeline system are in the $5 range depending on trucking costs. Published Enbridge pipeline tariffs from Clearbrook to Flanagan IL on the Lakehead system and then Flanagan to Cushing on the Spearhead pipeline are around $2.50/Bbl depending on shipper status. That puts the cost of delivering Bakken crude by pipeline to Cushing at $7.50/Bbl. The newly reversed Seaway pipeline from Cushing to Freeport, TX delivered its first barrels nearly two weeks ago on June 6, 2012. Seaway opens up a route for Bakken crude to the US Gulf coast refining center around Houston. We have heard Seaway estimated tariffs in the $3-$4/Bbl range with the lower price being available to shippers with reserved capacity. Total pipeline cost from the Bakken to the Gulf is therefore estimated to be ($7.50 to Cushing + $3 to Gulf Coast) = $10.50/Bbl.

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