It’s been well-reported that crude oil pipeline capacity is getting maxed out in many basins across the U.S. and Canada. From Alberta, through the heart of the Bakken, all the way down to the Permian, pipeline projects are struggling to keep up with the rapid growth in some of North America’s largest oil-producing regions. Crude by rail (CBR) has frequently been the swing capacity provider when production in a basin overwhelms long-haul pipelines. While it is more expensive, more logistically challenging, and more time-intensive, CBR capacity is typically able to step in and provide a release valve for stranded volumes. But recently, CBR capacity has been tougher to come by and has taken longer than expected to ramp up. A key aspect of this issue is a new requirement for up-to-date rail cars. Today, we look at how new rail demands and uncertainty in domestic oil markets are combining to create a major hurdle for new CBR capacity.
For a producer, trader or refiner to make CBR work, a number of things need to fall into place. First and foremost, the price has to be right. In other words, differentials need to be wide enough to support the cost of moving a train from, say, the Bakken to the East Coast — that’s about $8-$10/bbl. Second, producers or traders need to be able to source tank cars. That’s a big deal, and the primary focus of today’s blog. And you’ve got to match up a consistent supply of crude production, a CBR terminal that can handle the volume, a railroad willing to provide you with locomotive power and necessary contractual support, and finally, an end-market like a refinery. Getting all these dominoes lined up to facilitate CBR movements is extremely challenging.
In Figure 1 below, we show the historical price differential between West Texas Intermediate (WTI) at Cushing (OK) and Clearbrook (MN), the latter being a benchmark trading hub for Bakken barrels. We most recently discussed Clearbrook’s role in Bakken pricing in our Push Me, Pull Me series. As we noted in those blogs, the Bakken had a severe pipeline takeaway capacity issue until Energy Transfer’s Dakota Access Pipeline (DAPL) was completed in June 2017. Up until that point, WTI at Cushing traded at a large premium to Clearbrook, as much as a $13.40/bbl average in December 2013. During that time, CBR volumes skyrocketed to an average of almost 700 Mb/d from 2013 through 2015, with a peak of 830 Mb/d in December 2014. Differentials were high enough — and takeaway capacity so severely limited — to easily justify the cost of moving barrels by rail. Back then, putting Bakken barrels on rail cost $12/bbl or more. When the premium for WTI to Clearbrook started to decrease, so did CBR volumes. As more pipelines were completed, and production dipped during the mid-decade market downturn, CBR volumes fell to as low as 117 Mb/d in December 2017. Recently, Bakken production resumed its growth and area pipelines are getting overwhelmed by local North Dakota and Canadian production. The price spread has blown back out, with WTI trading lately at a $14.75/bbl premium to Clearbrook. Once again, we have seen rapidly increasing production, a lack of pipeline takeaway, and an ever-widening spread. You would think that this should make the Bakken ripe for a big rail comeback, so what’s holding it up?
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