Yesterday (August 3, 2015) Brent crude closed under $50/Bbl for the first time since January 2015. At that price expensive crude-by-rail (CBR) freight costs to the East Coast leave Bakken producers with netbacks not much over $30/Bbl. Yet CBR shipments to the East Coast were still over 400 Mb/d in May 2015 according to the Energy Information Administration (EIA). By 2017 there should be adequate capacity to get all Bakken crude to market by pipeline. But direct pipeline competition against rail to the East Coast is not expected until at least 2020. Today we look at the future of East Coast CBR.
In Part 1 of this series we covered the growth of crude-by-rail (CBR) transportation out of North Dakota from 2012 to 2014. Rapid increases in Bakken production outpaced pipeline capacity and new construction – leading to crude price discounts that helped justify more expensive rail transportation to coastal markets. CBR load terminal capacity in North Dakota increased to over 1 MMb/d in 2013. State data from the North Dakota Pipeline Authority (NDPA) shows that by April 2013 CBR was shipping 73% of Williston Basin output to market. Pipelines – which had carried 56% of crude to market in February 2012 – reduced their market share to 23% by February 2013. Then the price differentials that encouraged the CBR boom began to narrow. The discount of domestic benchmark West Texas Intermediate (WTI) to international crude benchmark Brent fell from an average of $18/Bbl in 2012 to $11/Bbl in 2013 and $6.50/Bbl in 2014. The narrower differentials made it harder for shippers to justify the higher cost of CBR to coastal markets as new construction increased pipeline alternatives. But even though the rail slice of crude traffic declined to just 52% by May 2015 there was still not enough capacity available to get all North Dakota’s crude to market by pipeline and about 0.5 MMb/d was still using rail – primarily to get to East and West Coast markets that do not have pipeline access. That picture is changing now – first because the rate of growth in Bakken crude production has slowed in 2015 in response to lower crude prices – making it easier for pipelines coming online to keep up with new production. And second - new projects are underway to build pipelines from North Dakota to markets on the Gulf Coast and the East Coast of Canada that – on paper at least - provide adequate pipeline capacity by 2017 for Bakken shippers to no longer need CBR. In this second installment we look at how Bakken netbacks have evolved and ponder how new pipelines could impact the future of rail shipments to the East Coast.
We start by recapping Bakken crude netback analysis that we first ran in May 2013 to determine the best route to market for North Dakota producers. At that time Brent was priced at an $11/Bbl premium to WTI and rail netbacks to the East and West Coast were higher than for shipping crude to Cushing, OK in the Midwest by pipe or rail (see Brent, WTI and Impact on Bakken Netbacks). By October of 2013 the Brent premium to WTI had narrowed to $6/Bbl and shipping crude by pipeline to the Midwest resulted in better netbacks than rail to the East Coast (see On the Rails Again). Last year we described crumbling crude netbacks in the second half of 2014 - as the price crash pushed WTI as low as $55/Bbl. Compared to averages in 2013, Bakken crude netbacks to all market destinations had fallen 50% or more by December 2014 (see Boom Clap The Sound of My Netback). Since then – as we shall see – North Dakota Netbacks have not recovered in 2015 but significant CBR shipments continue – even when the netbacks do not appear to justify them.