Heavy Sands Oil Discount to West Texas Intermediate -- Enbridge

First of all, a little rockabilly for all the Swedes in the Bakken (this has nothing to with the post itself; I just like to listen to music while reading and posting):


Swedish Film

Enbridge Energy Partners will be re-opening line 6B, the line that was closed following the pipeline spill earlier this year.

This story (the one linked above) gets into details I generally don't follow closely and would never think to post, except it provides a nice overview of several topics including a) various pipeline routes; b) discounts on Canadian oil sands heavy oil; and, c) restrictions placed on some pipelines limiting amount of oil that can be shipped.

It's a complicated story, and I don't know if I have it completely correct, but putting high quality Bakken oil into the Enbridge 6B pipeline will result in a discount for the Bakken oil also, despite it being much higher quality. This is why: at the end of the pipeline, the refiner pays for the quality of the oil that comes out of the pipeline. The refiner does not know what quality of oil went into the pipeline along the way; all he/she knows is the quality of the oil that comes out of the end of the pipeline into his/her refinery. The lower the quality, the lower he/she will pay for the oil. Obviously the more Bakken oil, the higher the quality and the higher the price.

Unfortunately, mixing all that lower-quality Canadian sands oil into the pipeline lowers the quality of the oil that comes out the other end. So, I assume there's a complicated formula to determine how much Enbridge discounts high-quality Bakken oil when it enters the pipe.

On the other hand, there is no discount taken on high-quality Bakken oil when it is shipped by rail, since it ends up at the refinery as high-quality oil. However, it costs more to ship by oil.

As more and more railroad oil loading facilities come on line and more and more oil is shipped by rail, the unit (or "per barrel") cost probably comes down. It is my understanding that the difference in  price paid for oil carried by pipeline and that carried by rail is becoming narrower and narrower (but rail is still more costly).

On another note, opening of line 6B is very, very important to the Bakken companies. I believe I read some months ago that Whiting said they would miss their third-quarter production targets due to the two oil spills that closed the pipelines. EEP paid a markedly lower distribution in the third quarter as a result of that. I assume, if there are no further problems, Whiting should meet their fourth quarter production targets and the distribution should come back nicely. We'll see.