Why price differential and rail competition challenge Bakken

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Dec. 4 2020, Updated 10:52 a.m. ET

Price differential and rail competition challenging Bakken pipelines

Crude oil production in the Bakken grew from ~266,000 barrels per day in January, 2009, to 1.01 million barrels per day in January, 2014, according to the North Dakota Pipeline Authority (or NDPA). However, new transportation infrastructure signals an ease in the bottleneck in North Dakota and contributes to a narrowing of the price differential between the Bakken and West Texas Intermediate (or WTI) crudes.

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The increase in domestic production of light, sweet crude oil is inconsistent with the investments already made by a number of U.S. refining companies in order to expand their capabilities to process heavier, sour grades of crude oil. This divergence between increased refinery demand for heavy sour crude oil and readily available supplies of light sweet crude oil caused differentials between crude oil grades. This increase in light, sweet crude oil production has also resulted in a decrease in foreign imports of light sweet crude into the U.S.

Traditionally, crude oil imported to the U.S. Gulf Coast and domestic production from west Texas was transported by the mi-continent pipeline system to the refineries in the Midwest via Cushing, Oklahoma. However, transportation constraints resulting from limited pipeline capacity into and out of Cushing have led to bottlenecks in the region. In the past, increasing Bakken production faced severe transportation constraints, which resulted in huge price differentials. In March, 2012, the discount between North Dakota and Oklahoma crude oil prices reached $17 per barrel, while the discount to Brent crude was $38 per barrel. The addition of new pipeline and rail takeaway capacity from the Bakken region was aimed at getting crude to the refining markets on the East and West coasts, as well as the Gulf Coast, avoiding Cushing, Oklahoma. This resulted in Bakken crude oil briefly selling at a premium to WTI during the end of 2012. Currently, Bakken oil is selling at a ~$8 and ~$16 discount to Oklahoma and Brent crude price.

Crude via rail transportation

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Although pipelines are the cost-effective way to transport crude oil, they require huge initial investment and are often impeded by regulations from the government agencies. This led many companies to turn to rail transport to deliver crude oil. While total takeaway capacity from the Williston Basin grew from about 678,000 barrels per day at the end of 2011 to over 1.6 million barrels per day in March, 2014, takeaway capacity via rail increased remarkably. It increased from an estimated 265,000 barrels per day in 2011 to approximately approximately one million barrels per day in December, 2013. Currently, ~62% of Bakken crude oil transportation capacity is met by the railways.

However, the situation is expected to undergo a change led by huge investments in increasing pipeline capacity in the Bakken. By 2016, pipeline capacity—1.6 million barrels per day—is expected to exceed rail capacity—1.4 million barrel per day—according to the estimates by the NDPA.

Higher production at the Bakken Shale of the Williston Basin is encouraging for the midstream pipeline operators. Increased transportation requirements will be positive for crude oil pipeline suppliers in the Bakken including Enbridge Energy Partners (EEP), Energy Transfer Partners (ETP), and Plains All American (PAA). These are master limited partnerships (or MLPs). They’re components of the Alerian MLP ETF (AMLP). Increased transportation capacity would also benefit oil producers like Oasis Petroleum (or OAS), Whiting Petroleum (or WLL), and Continental Resources (or CLR) through higher price realization. All of these are components of the SPDR S&P Oil & Gas Exploration & Production (XOP).

 

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