Next year, the percentage of North Dakota oil shipped via rail will likely increase significantly as producers turn more to trains to reach U.S. refineries where premium prices are fetched, an official with North Dakota's Department of Mineral Resources said on Thursday.
Lynn Helms, the DMR's director, told the Legislature's Government Finance Committee that he anticipates as much as 90% of the state's oil will be transported by rail next year, an increase of approximately 60% from the current rate.
Helms has previously said that North Dakota, home of the Bakken shale formation, is on track to surpass oil production of 1 M/bd early in 2014. North Dakota is the U.S.'s second-largest oil producer behind Texas.
Lynn Helms, North Dakota's Mineral Resources Director; Source: sayanythingblog.com
Since July, North Dakota's oil prices have fallen from approximately $96 per barrel to an average of $73.50 this month. The benchmark price for light sweet crude is set in Cushing, Oklahoma. Helms said that oil originating from Texas and North Dakota is "flooding" Cushing, the major crude hub where most U.S. shipments are sent.
Helms said further that crude transported via rail to East, West, and Gulf Coast refineries can attract up to $30 more per barrel than the benchmark set at Cushing.
It costs roughly $6 per barrel to transport oil via pipeline and about $12 per barrel by rail. Moreover, even with the higher shipping, producers can net approximately $24 more per barrel by sending it on trains, Helms said.
In 2008, North Dakota reached its then-capacity for pipeline shipments of 189 K/bd. It was then that the state began shipping oil by trains, said Justin Kringstad, director for the North Dakota Pipeline Authority.
Only a year ago, rail accounted for only 50% of the state's oil shipments. In recent years, in excess of $2 billion has been spent on infrastructure and almost two dozen railed-oil loading facilities.
Kringstad stated that he also believes that especially during times of falling oil prices, more crude will move by rail than pipelines.
"I suspect they're going to move more by rail if the price differential remains as it is," he commented.
Crude By Rail or Pipeline?- A Closer Look
In the past several years, the amount of oil moved out of North Dakota's Bakken region by rail has drastically increased. In 2008, only 9,500 bpd were shipped out of the Bakken via rail. By 2010, 50,000 bpd were shipped. And by 2012, the volume increased to 500,000 bpd.
The State Department forecasts that by 2016 the U.S. could have the capacity to transport up to 2.7MMbd of crude by rail. This capacity would transport oil from the Bakken shale formation in North Dakota, the Woodford/Anadarko region in Oklahoma, the Eagle Ford play in Texas, the Niobrara shale in Colorado and Wyoming, and the Utica shale in Ohio.
The Association of American Railroads (AAR) reported on May 30 that U.S. rail transportation of petroleum and crude products increased 51.8% year-to-date over the same period in 2012. The graph below demonstrates the recent drastic rise of crude transit via rail in the U.S.
The AAR says that the preeminent advantage of transporting crude via rail car is the ability to provide transportation capacity in many areas where pipeline capacity is insufficient. Hence availability and flexibility are the main advantages that railroads have over pipelines. Additionally, railroads are the only mode of transportation that can invest in facilities with sufficient speed to keep up with production growth in emerging oil fields. Further, railroad efficiency enables customers to find ways to reduce en-route delays and unload tank cars more quickly. The enormous investments of crude oil producers and other market participants in railroad infrastructure manifest confidence in the long-term viability of rail service in this market. The results of this infrastructure can be seen in the map below which graphs the presence of NAM freight railroads:
In recent years, railroad transit of crude has demonstrated another advantage over pipeline transit: greater safety. According to the U.S. Department of Transportation's Pipeline and Hazardous Materials Safety Administration, the "spill rate" from 2002-2012 for railroads was about 2.2 gallons per million crude oil ton-miles generated. Conversely, the pipeline spill rate was about 6.3 gallons per million ton-miles generated during the same period, or almost three times the rail spill rate. 129 incidents involving the release of crude from railroads occurred during the 10-year period, while pipelines reported 1,784 spills, more than 50 times the number of rail incidents.
The largest source of rail's success has come from the Canadian oil sands and the Bakken shale formation. EOG ships 100% of its Bakken crude using rail, for instance. Further north, two of the largest crude rail transport companies, Canadian Pacific and Canadian National Railroad, both anticipate crude shipments to double in 2013. Thus both rail and crude companies have benefited from the 4-year oil-via-rail growth trend.
So is the sky the limit for crude-via rail? Not exactly. While, as written above, there are many advantages to the practice, cost and capacity are not among them.
In terms of cost, compared to pipelines, transporting crude via rail is very expensive. According to research firm Wolfe Trahan, oil shipments by rail are approximately $10-$15 per barrel, compared to $5 per barrel for crude transported via pipeline. Late in the last decade, when rail shipments were drastically increasing, refiners and producers were willing to pay a premium because of the differential advantage of railed crude vs. imported oil. But as the price spread between foreign and domestic crude continues to narrow, the advantage of oil by rail weakens.
And in terms of capacity, the Canadian oil sands and Bakken Shale Play present major threats to oil-by-rail. TransCanada's Keystone XL Pipeline, Enbridge's Northern Gateway pipeline, and Kinder Morgan's Trans Mountain Pipeline could together potentially transport nearly 2 MMBPD of Canadian oil sands to either the Canadian West Coast or U.S. Gulf Coast. But each of these companies' projects are mired in political debates that render their ultimate approval dubitable.
In conclusion, even though the transport of crude via rail has become more widespread over the past 4 years, and has some advantages, the debates surrounding pipeline approvals, especially Keystone, are critical. As has been reiterated by government and industry leaders, and as indicated in poll and poll of the populace, approval of Keystone would cut transport costs, increase the quantity of crude shipped, create jobs, facilitate a greater degree of energy security, and strengthen ties between the U.S. and its northern neighbor. And it must be kept in mind that rail is being used only because of the insufficiency of pipelines.