RBN Energy: update on Bakken CBR -- archived:
Crude prices are hovering around $30/Bbl making crude–by-rail (CBR) transport an expensive option for hard pressed producers looking to conserve cash – especially where pipeline alternatives are available. The crude price differentials that once justified shipping inland crude to coastal destinations by rail have all but disappeared. In November, 2015 pipeline shipments exceeded rail out of North Dakota for the first time since 2011 and by 2017 available pipeline capacity out of the region should exceed producer’s needs. In the circumstances, rail shipments would appear to be living on borrowed time but as we describe today - some North Dakota rail shipments are continuing in spite of the poor economics.
In Part 1 of this series we noted that CBR volumes are falling across the U.S. and Canada. The decline is mostly in response to narrower spreads between U.S. domestic crude benchmark West Texas Intermediate (WTI) and international equivalent Brent. The lower the spread between these two the lower the incentive to move crude from inland basins to coastal refineries by rail because the latter is a more expensive transport option compared to pipelines. When WTI was discounted to Brent by upwards of $25/Bbl in 2011 and 2012 because of congestion caused by a lack of pipelines it made sense to use rail to get stranded crude to market. We described the resulting increase in U.S. CBR shipments from 33 Mb/d in January 2010 to a peak of 928 Mb/d in October 2014 (according to the Energy Information Administration - EIA).
As new pipelines have been built out to provide less expensive options to get stranded crude to market so the WTI discount has narrowed. After crude oil prices collapsed into the mid-$30s and Congress repealed regulations limiting U.S. crude exports in December 2015, WTI began to trade at a slight premium to Brent that averaged $0.26/Bbl in January 2016. In response to the narrowing spreads - CBR volumes fell during 2015 but not as fast as you might expect – dropping only 20% between January and November 2015 (latest EIA data) even though the economics often made no sense. The slow decline in CBR traffic is because committed shippers and refiners continued to use rail infrastructure that they invested in and because some routes still do not have pipeline access.
This time we kick-off a region-by-region CBR round up in North Dakota – where it all began back in 2010.