Refiners ultimately determine crude price values. Refining margins vary by location, crude quality, product prices and refinery configuration. Today we return to the Bakken to conclude our series: The Bakken Buck Starts Here – Bakken Crude Pricing Part IV - to discover that a longer journey to market might just be the most profitable.
Today’s blog completes the final leg of our voyage of learning from the wellhead to the refinery in pursuit of the true value of Bakken crude. If you are new to this series then you probably need to read the earlier installments to get your money’s worth from this finale. These links will help get you there quicker: (Part I), (Part II) and (Part III).
Before we get started let’s do a quick recap of the journey so far. In Part I we looked at posted prices for Williston crudes in North Dakota and learned that crude quality has a significant impact on pricing. In Part II we narrowly avoided a brawl in a Williston bar as we compared posted prices to spot market trades at the pipeline hub in Minnesota. More importantly we discovered that the linkage between Williston crudes and WTI Cushing has broken down because of constraints making it difficult to get Bakken crudes to Cushing and from there to refiners on the Gulf Coast. In Part III we followed the Williston crude oil trail to refineries across the US on four different routes to refinery gates. First we travelled east on log jammed pipelines to Houston via Cushing. Second we turned west to join the Kinder Morgan Platte pipeline to Wood River IL. Third we took a long train ride south to St. James on the Louisiana Gulf Coast. Fourth and last we embarked on a safari by truck, train and barge to reach beleaguered refiners (see Don’t Let The Sun Go Down on Me Part I) on the East Coast. We then compared estimated transport costs for each of these routes to market.
Today we uncover the relative value of Williston Sweet crude to refiners in the four markets we gathered transport costs for in Part III – Houston, the Louisiana Gulf coast, the Midwest and the East Coast. In each market we calculate a simple refiners profit margin based on a rule of thumb method. Along the way we take a lesson in different crude types, different refinery types, refinery yields and refining contributions.
As we explained in Part I (and in case you’ve forgotten), there are many different crude oil types and each one has its own qualities. We touched on the differences between sweet and sour crudes and learned that sour crudes cost refiners more to process because environmental regulations require the sulfur in sour crude to be removed. In addition to sweet or sour the other broad characteristic of crude oil is the gravity or API. We also learned in Part I about crude oil gravity and gravity adjustment. In the same way that sweet crudes are more highly valued than sour crudes, light crudes with a higher API gravity are generally more valuable than heavy crudes with a low API gravity (up to a point). That’s because lighter crudes generally produce more high value products like gasoline when refined. Heavy crudes such as Canadian Oil Sands Bitumen yield greater quantities of lower value refined products like fuel oil. The crude that we are following to market today is Williston basin sweet crude - a relatively light crude with a gravity of 41 degrees API and a sulfur content less than 1.0 percent making it a light sweet crude.