Monday, February 22, 2016; Update On Rocky Mountain CBR

Active rigs:

	2/22/2016	02/22/2015	02/22/2014	02/22/2013	02/22/2012
Active Rigs	39	127	187	183	203

RBN Energy: Update on Rockies CBR (archived).

According to the latest Energy Information Administration (EIA) monthly Drilling Productivity Report, crude production from the Niobrara shale in Colorado and Wyoming peaked at 491 Mb/d in April 2015 and is forecast to decline by ~100 Mb/d to 388 Mb/d through March 2016 – in response to falling crude prices and lower drilling activity. Meantime midstream companies are still building new pipeline capacity out of the region with the Saddlehorn and Grand Mesa projects set to add 350 Mb/d of takeaway capacity this year (2016). The pipeline build out has already caused a shift of crude shipments away from crude-by-rail (CBR) that peaked in December 2014. Yet as we describe today - rail terminals and infrastructure are still under construction in the region.

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 pipeline capacity,  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  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 and CBR traffic has declined. After crude oil prices collapsed into the mid-$30s and Congress repealed regulations limiting U.S. crude exports in December 2015, WTI began to trade at a slight premium to Brent that averaged $0.26/Bbl in January 2016. Primarily in response to the narrowing spread - 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.

As we discussed in Part 2 – looking at the epicenter of the CBR boom in North Dakota – the slower than expected decline in rail shipments is mostly 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 look at CBR traffic out of the Niobrara shale region in the Rockies.

Note: it is my opinion that CBR is not dead. It is my opinion that the Sandpiper (Enbridge) and the Dakota Access (ETP) are both dead. We've seen that movie before (the Keystone XL) and these are simply the sequels. If Hillary Clinton is elected president, it will pretty much be the final nail in that coffin (or two coffins, as the case may be).