Saturday, December 22, 2012

Rail Trumps Pipelines For Bakken Oil

Link to The Bismarck Tribune.
Oneok’s official statement said, “We did not receive sufficient long-term commitments under the terms we needed to construct the Bakken Crude Express Pipeline.”
Just days before, a 103-car train carrying Bakken crude arrived in Tacoma, Wash.
The postponement of the pipeline and the North Dakota-Tacoma oil-by-rail connection are directly related. They open another chapter in the state’s relationship with the railroad and oil development.
Much of the focus had been on moving North Dakota crude to refineries in Tulsa. But the big increases in domestic oil production have created an over supply in the Tulsa area. That’s where the Bakken Express was headed, and that’s where Keystone XL intends to connect before heading to the Gulf.
Not only that, oil companies in North Dakota are pumping crude and need to move it now. Those pipelines are years from reality.
The stars aligned for BNSF Railway.


  1. With the obvious caveat that circumstances change, it is hard to see how pipeline companies move forward in wb from here. The up front commitment and the time delay time to build out pipeline are hard to overcome and operators seem to have priced in rail and are unwilling to commit to pipeline at this time. If/when a pipeline gets announced, rail tariff will go through the roof as rail would be phased

    1. Successful corporations have learned to define what business they are in.

      I think companies like BNSF succeeded when they realized they were not in the "railroad" business but the shipping business, and that's when "inter-modal" became a success (standardized shipping containers from ship to rail to highway trucking).

      Likewise, Enbridge has this figured out. They are not a pipeline company. They transport oil: they now have Enbridge Rail.

      So, it's going to be a mix. But it is interesting how things have changed, so quickly.

    2. Right. What I find fascinating is that for the last 4+ years that every study and every opinion on the issue came to the same conclusion. Namely, the bakken was so big that pipeline expansion was the obvious solution to transport (historically, smaller fields/basins have always had a mix of rail and pipeline )
      Now, pipeline expansion is boxed in by two factors that were ways present but apparently never accounted for in long term planning. Number 1, if your pipeline terminates in a location (Tulsa) that gets overwhelmed, then what do you do? You have to move the crude somewhere. So unlike rail, pipeline flexibity as to where the crude ends up is limited. Secondly, time is on the side of rail as the amount of oil remaining to be moved will level off at some point so the longer time goes on, unless reserves grow.
      The mineral owner takes a hit as the rail differential comes directly out of his bottom line. Same for the operator. In retrospect, the handwriting was on the wall when eog invested in rail a few years back. The Cushing bottleneck and the pipeline companies refiners response essentially "suck it and take less for your crude or move it elsewhere at your cost" "nailed it for the pipeline companies. Pipeline will get it's share but 5 years ago pipeline didn't think it needed to go to rail to grow yet that is what has happened and I have to assume pipeline compains have scaled back revenue projections from what they were a few years ago.

    3. Bakken oil shipping to Cushing is competing against WTI crude.

      Bakken oil shipping to the Pennsylvania refineries is competing against Brent crude.

      Compare WTI vs Brent.

      That's why rail works.

      Reminds me of a joke.

      Two hikers in the forest see a bear. One hiker gets down and starts putting on tennis shoes. The second hiker says, "You can't outrun the bear."

      The first hiker responds: "I don't have to outrun the bear. I just need to outrun you."

    4. Same joke Bruce only the hiker pulls out a small .22 pistol, second hiker says, you can't kill the bear with that. First hiker says, nope but I can slow you down with a shot to the knee. Can you imagine the Berkshire money behind Obamas decision on XL?

    5. That's really "hardball" -- using a pistol. Smile.

      Having said that, the Buffett/BNI/Keystone XL story is very, very interesting. I think I was one of the first to mention it, well before the most others started talking about it.

      I will ramble a bit, but in the end, I don't think Buffett had any insight to the impending Keystone XL debacle. I was going to post a story on that earlier today, but didn't think anyone would care. The point was this: scroll through "Yahoo!In-Play" on a daily basis and look at all the pipeline deals that are made, almost on a daily basis, it seems. Pipelines are a no-brainer. No one saw this coming with TransCanada; hindsight is 20-20 but there was nothing to suggest that this pipeline was anything other than just another (albeit, big) pipeline. I don't think Buffett could have seen this either.

      Break. Break. I've noted for years that railroads, particularly in the west, have a relative monopoly and a huge moat. That's why I started investing in BNI back in the late 1980's, one of my best investments (until bought by Buffett). I think Warren saw the same thing: a relative monopoly with a huge moat. No one in a hundred years would have thought the Bakken needed rail. In fact, the Keystone XL still will have almost no effect on the Bakken. Bakken oil is more profitable going east and west, not south.

      You may be right, but I think Buffett was simply very, very lucky with regards to the Keystone, but interestingly enough, it is Enbridge that is the real winner. The Bakken saved BNI; the Keystone XL carrying Canadian oil is probably an overplayed BNI story. I don't know how Canadian oil is getting to Cushing (I assume the original Keystone), but it isn't in BNI railcars as far as I know. That's Bakken oil.