Bakken crude: Could pipelines replace the need for oil-by-rail?
By Zach Koppang, August 14, 2015
The transportation of Bakken crude is beginning to shift away from the railways and into pipelines as production levels off in the wake of last year’s price collapse and more oil and gas pipelines are brought online.
Rusty Braziel, analyst with RBN Energy, explained, “Since 2012 a combination of rail and pipeline has given Bakken producers ample crude takeaway capacity, but pipelines alone have not had sufficient capacity on their own.” Though, as production maintains a consistent rate, pipeline capacity is beginning to catch up. Braziel added, “By 2017 there should be enough pipelines to carry all North Dakota’s crude to market.”
Last week Continental Resources reported that it now ships over two-thirds of its Bakken crude by pipeline, reports Reuters. In the second quarter 2015, the company, North Dakota’s second-largest producer, pushed approximately 160,000 barrels of crude per day through Kinder Morgan owned pipelines. For comparison, it shipped nearly all of its oil by train in 2014. During a conference call, Continental CFO John Hart said, “Approximately 70 percent of our Bakken production is now delivered to market via pipeline.”
Director of RBN Energy Analytics Sandy Fielden said, “As soon as price differentials – especially between domestic benchmark West Texas Intermediate (WTI) and international benchmark Brent – narrowed, then barrels shifted back to pipelines to take advantage of their cheaper tariff rates. Yet significant crude volumes continued to be transported to market from North Dakota by rail because pipeline capacity could not handle the demand.” Recently, however, the planning and construction of new pipelines throughout the region has substantially increased overall shipping capacity, threatening the once booming business of BNSF Railway and others.
The trend is becoming more common as oil producing states, North Dakota included, begin to rely more heavily on pipelines rather than rail transport, which is vulnerable to weather, construction delays and bottlenecks. Transporting oil-by-rail has also become heavily scrutinized following a series of explosive, and sometimes deadly, oil train derailments. The most notable incident occurred in Lac-Megantic, Quebec, where a runaway oil train derailed and killed 47 people. The frequency and severity of derailments has led to increased scrutiny and regulation, much to the dismay of the rail industry.
However, Fielden explains, “Just because pipeline capacity is available doesn’t necessarily mean producers will prefer to use that capacity instead of rail.” Over 1 million barrels of oil per day continue to ride U.S. railways en route to refineries on the east and west coasts. Tesoro and BP, for example, opt to receive oil via rail due to the flexibility of the supply contracts when compared to pipeline shipments.
The RBN analysis reports that in theory, as new pipeline projects come online, all Bakken crude could be shipped to market via pipeline. Projects due to begin operating by the end of 2016 and throughout 2017 will expand takeaway capacity by 680,000 barrels per day. Fielden said, “The planning and buildout of a series of new pipelines out of North Dakota that (if they are all built) should increase capacity enough to provide space for all the barrels currently traveling to market from North Dakota by rail.”
TIME TO TAKE A CLOSE LOOK AT OUR STARTLING SUCCESS in solving our energy problems with oil — good old American Bakken crude along with a hefty swash of that Canadian tar sands crude. Canada being a very friendly neighbor, this seems a great deal on both sides of the border. And thanks to a fine railroad system, it’s just a simple straight shot from North Dakota and Alberta right up to our door here in Benicia, California! Providence be blessed!
And yet there are, as always, folks who not only want to examine that gift horse’s teeth but can be just plain ungracious — if not downright surly and disagreeable — about it. What could possibly be wrong with cheaper oil in copious quantities, without ever having to deal with folks who don’t even speak English?
But enough. I’ll step out of the Joe Schmoe character and comment just a bit on that question of what can, in fact, possibly be wrong.
From an Earth Island Journal clipping (June 29, 2014), a piece by Adam Federman, we read: “Since the Lac-Mégantic disaster (with its 47 dead) there has been a string of oil train collisions and derailments. Late on the night of November 7, a train carrying at least 2.7 million gallons of Bakken crude derailed near Aliceville, Alabama, resulting in dramatic explosions similar to those seen in Lac-Mégantic. Because the train exploded a few miles outside of Aliceville, no one was injured or killed. On December 30, a train carrying crude collided with another train outside of Casselton, North Dakota, releasing more than 400,000 gallons of oil into the surrounding land. At least half the town’s 2,400 residents were evacuated, though no one was injured. And on April 30, an oil train operated by CSX derailed in the city of Lynchburg, Virginia, sending flames and oil into the James River and forcing the evacuation of more than 300 residents. Last year more oil spilled in rail accidents — 1.15 million gallons — than the previous 35 years combined.” (Italics mine)
Then the following:
“Extra-flammable Bakken crude riskier to ship by rail than other oil, U.S. safety watchdog warns,” by Jeff Lewis, Jan. 2, 2014:
“CALGARY — U.S. authorities said Thursday crude oil shipped by rail from the Bakken shale in North Dakota across the United States and Canada ‘may be more flammable’ than other types of oil, as the latest in a string of explosive accidents focuses attention on the booming oil-by-rail trade.”
How about we ditch that “may be”! For example, another read on Casselton:
“‘There was a huge fireball’: Train carrying crude oil explodes after derailing in North Dakota,” by Dave Kolpack, Associated Press, Dec. 30, 2013:
“A train carrying crude oil from North Dakota’s oil patch derailed Monday near the small town of Casselton, setting off a series of fiery explosions. No injuries were initially reported, but officials were warning residents to stay indoors as the situation unfolded. Cass County Sheriff’s Sgt. Tara Morris says as many as 300 residents of Casselton may be evacuated.
“Morris estimates about 10 cars from a mile-long train caught fire and will have to burn out. She said it could take up to 12 hours before authorities can get close.
Next, “How crude-by-rail accidents may impact the U.S. oil market,” Reuters, Jan. 23, 2014:
“A spate of high-profile crude-by-rail accidents is making oil analysts consider how tighter rail safety standards could impact U.S. oil markets, by potentially crimping a mode of transport that has grown exponentially amid the shale drilling boom.
“Any regulation or industry-driven move to hastily sideline a fleet of some 75,000 older tank cars commonly used for shipping crude could roil U.S. oil logistics, boost costs for refiners, and even hit output from North Dakota’s giant Bakken field, oil analysts said.
“The scenario that many view as more likely — where older rail cars could be gradually retrofitted or retired — would be less disruptive but still raise transportation costs.” (And, of course, forestall greater dangers, but what the hell, what’s life without a little spice!)
“Tank cars known as DOT-111s are used to transport most of the 10 percent of U.S. oil production, or around 800,000 barrels per day, that is shipped by railroad. The cargoes have surged over the past half decade, offering drillers in fast-growing shale plays like the Bakken a quick and flexible way to send barrels to consumer markets without relying on limited regional pipelines.
“DOT-111 rail cars built before 2011, which have been involved in several accidents, are under scrutiny for safety issues that make them more likely to puncture in a derailment.
“Over the weekend, a train carrying North Dakota crude derailed in Philadelphia, although there was no fire or injuries.
“‘I view this as a potentially hugely significant rail risk,’ said Credit Suisse’s Jan Stuart, referring to how new crude-by-rail safety measures could impact Bakken-region oil logistics or production.” (That risk of course is financial, and when you’re talking financial risk, man you have an audience; human risk, risk to life and limb — not so much!)
“So far, the Department of Transportation has set a schedule for next year to draft new regulations, including updated tank car specifications, but it is facing pressure to move faster.
“‘Regulators have endorsed the new safety standards for newly built cars, but so far have not required any retrofitting,’ said Sandy Fielden of the RBN Energy consultancy in Austin. ‘If the existing fleet of older cars were to need retrofitting, it would be very disruptive.’”
And why in hell would we be wanting to do anything “disruptive” when the money is rolling in so beautifully! Is it that hard for people to focus on the crucial bottom line?!
“In the fast-growing Bakken, where pipeline capacity has not kept up with oil production, more than 70 percent of output that is approaching 1 million barrels per day now moves by rail, according to the North Dakota Pipeline Authority.
“Over half of the U.S. crude moved by rail hails from the Bakken, where the trend has allowed drillers to quickly send their barrels to refineries in the biggest fuel markets along U.S. coasts where they fetch higher prices, boosting profits.
“‘The most likely scenario is for regulators to gradually phase in safety improvements,’ said energy analyst Michael Wittner of Societe Generale. ‘That could increase transportation costs, but if there were a decision to replace older tank cars on short deadline, crude would be piling up in North Dakota.’” (Let’s not be disrupting the flow of oil — and cash.)
“Retrofitting the entire fleet of older DOT-111s would be costly and take up to ten years, the Rail Supply Institute, which represents tank car owners, said last year, in part because manufacturers are already struggling with a backlog of tank car orders. Newer DOT-111s feature safety improvements, but comprise only around 14,000 cars so far, according to the AAR.
“Sidelining older DOT-111s could depress Bakken oil prices at the wellhead as producers compete for insufficient pipeline capacity, eventually hurting production, Fielden said. Any fall in deliveries by rail could force some coastal U.S. refineries to go back to buying more expensive crude imports.
“If all older tankers were retrofitted, it could add between 20 and 40 cents per barrel to crude-by-rail costs, assuming a cost of $30,000 to $60,000 per car, according to a report this month from Turner, Mason & Company consultants.
“Should producers have to rely just on pipelines, Bakken deliveries would plummet to less than 600,000 bpd at the most, less than 60 percent of daily output, according to the state pipeline authority.
“Because of its rapid output growth and isolated location from fuel markets, only a small portion of Bakken crude is processed in facilities known as fractionation plants, which strip out volatile gases like propane and butane, known as light ends. The plants can require large up-front investment, and years to build.” (Whoa there, time and money again? Forget it!)
“‘Regulatory costs are going to go up, it’s just a question of how high and how fast,’ said Robert McNally, president at U.S. energy consultant Rapidan Group. ‘I expect officials will try to find a sweet spot where timely and adequate regulations … do not cripple Bakken economics.’” (Ah yes, a sweet spot that doesn’t interfere with profit!)
Just maybe in all of that there are some lessons for those of us living in Benicia, California about the priorities that should be guiding our decisions when it comes to bringing in Bakken and Canadian tar sands crude. Our neighbors to the east on that train route are obviously deeply concerned; why not Benicia?
Should an accident or major spill occur on that clearly precarious route down the Feather River Canyon, the damage to river, reservoir and water supply would be incalculable. And what of Sacramento and Davis and their obvious great vulnerability — have we no responsibility to our neighbors along that long trail from Alberta or North Dakota to Valero?
And, finally, of course, there is that bloody problem of the environmental costs of jacking up our use of not just more oil — bad enough in itself — but the most dangerously polluting stuff we can find. A bizarre example of man’s capacity to blot out the future in the pursuit of — just what?!