Bakken Crude Can Get Premium Prices on the West Coast

Tesoros Carson Refinery

Bakken crude can realize premium prices by moving west. The only problem is there isn't much receipt capacity. Long distances, very little pipeline capacity, and limited rail mean it's hard to move crude West out of ND. Recent estimates show more than 40,000 b/d of Bakken crude is being transported to Washington, but only a few thousand barrels per day is making its way south into California. That's a problem. West Coast refineries are paying over $105 per barrel for Alaskan crude, while oil in North Dakota is trading for as little as $80 per barrel.

Assuming it would cost $15 per barrel to move crude by rail to Southern California, those looking to profit stand to make $10+ per barrel based on current spreads. That's more than enough incentive for refineries and midstream companies, but its easier said than done.

"It's entirely possible California refiners decide they can't get this done in time to catch the arbitrage, so refiners wouldn't get the benefit of low-cost crude from the Midcontinent," said David Hackett, president of energy consultancy Stillwater Associates.

East Coast and Gulf Coast refiners are enjoying some of the best margins in the world, but on the West Coast, refiners are missing the party. If significant rail receipt capacity isn't built or pipelines converted to oil, refineries might miss out on the benefits of the current domestic oil boom all together.

Tesoro mentioned two relevant measures at its analyst day in early December 2012:

• Access to cost advantaged crude
• Ability to cost-effectively address regulator compliance

Bakken crude can help with first issue, but they're going to have to get the state on their side to make advances with the second issue. Coming off a recent $2.5 billion acquisition of the Carson Refinery from BP, Tesoro has plenty at stake and I don't expect they'll let the current oil boom pass them by.

North Dakota Oil Production Up 400% Since 2008

ND Oil Production Chart

It's no secret North Dakota oil production has been on an amazing growth trajectory. Recent figures show the state set a new production record in September of 2012 with more than 728,000 b/d of oil production. The state is only second to Texas and the two look to be separating themselves from the pack. Alaska and California rank third and fourth in oil production, but neither has a growth engine like the Bakken.

Production in ND has more than doubled in the past two years. Operators have hit their stride in terms of the development, the play has proven to be larger than most expected (multiple horizons and larger area), and pipeline projects and rail agreements are relieving the midstream problems that have plagued the area.

In the most recent infrastructure development, read more about Enbridge's New Sandpiper Project

U.S. Production Reflects ND's Growth

North Dakota is not alone. Production declines have reversed across the country. The U.S. produced almost 6.5 million b/d in September, the highest level in almost 15 years. You have to go back to September 1997 to find comparable figures. The low was September 2008 when the U.S. produced just under 4 million b/d. Production is up 62% since. Where it goes from here is largely dependent on commodity prices. The resource is there (e.g. Permian, Eagle Ford, Bakken, Offshore), but lingering risk and subsequent questions will shift to economics if oil prices were to fall considerably.

Enbridge's Sandpiper Project Will Expand its North Dakota System

Sandpiper Project Map - Enbridge

Enbridge is planning a new 600-mile, 24-inch pipeline, the Sandpiper Project, from Beaver Lodge, ND, to Superior, WI. The Sandpiper Project has a planned cost of $2.5 billion and will move 225,000 b/d of Bakken crude The pipeline is part of a larger program in which Enbridge will invest $6.2 billion to increase accessibility to North Dakota and Western Canada's light crude. In total, the system expansions will move 400,000 b/d of light oil. The pipeline has shipper support and is expected to be completed in early 2016. FERC approval is required before construction begins.

The Sandpiper Project is likely a determining factor in Oneok Canceling the Bakken Crude Express. If Enbridge's estimates prove true, you could see the Bakken Crude Express or a similar project come back to life. Current production is near 700,000 b/d and Enbridge expects it could grow to 1,200,000 b/d in the next five years.

"This $6.2 billion investment rounds out our suite of major crude oil new market access initiatives for North American markets," said Al Monaco, President and Chief Executive Officer, Enbridge Inc. "..... These market access initiatives reflect changing North American supply and demand fundamentals and will create significant value for our customers....."

It must be a promising investment. Enbridge has a total of $26 billion in projects planned between 2012 and 2016. That's impressive considering the company (ENB) has a market cap of ~$35 billion. Add Enbridge Energy Partner's market cap and it's closer to $43 billion - still no small feat. The $2.5 billion Sandpiper Project will be funded by EEP.

Plains All American - U.S. Development Corp Reach $500 Million Rail Deal

Van Hook Terminal - New Town, ND

Plains All American Pipeline (PAA) has reached a $500 million deal to buy four rail facilities from U.S. Development Group. The four facilities are rail terminals:

• Van Hook Crude Terminal - New Town, ND (servicing the Bakken)
• Niobrara Crude Terminal - Carr, CO
• Eagle Ford Crude Terminal - Cotulla, TX
• St. James Rail Terminal - St. James, LA

The three crude terminals have daily loading capacity of 85,000 b/d and the rail terminal at St. James has unloading capacity of 140,000 b/d. An unloading facility is also planned for Bakersfield California.

The Van Hook Crude Terminal received oil by truck in New Town, ND, has capacity for 208 rail cars, and can move as much as 65,000 b/d. There is also 12,000 bbls of storage onsite. The terminal is serviced by Canadian Pacific Railroad. Most of the crude moving from the terminal ends up in St. James, LA, where the facility can handle 300 loaded railcars at one time or 130,000 b/d. The St. James Rail Terminal also ties into several pipelines, including one owned by PAA.

"These assets represent a very attractive addition to our existing North American rail activities...." said Greg L. Armstrong, Chairman and CEO of PAA. "Given recent and projected increases in North American crude oil production and volumetric and quality imbalances expected to occur in certain regions over the next several years, we believe that strategically located rail loading and unloading assets will continue to play an important role in the transportation of crude oil in North America."

Crude oil pricing is as dynamic as ever across the U.S. Growing production in the Bakken and West Texas have put downward pressure on WTI (priced at Cushing, OK). On December 7, 2012, WTI was trading at a little less than $87 / bbl and Brent crude was trading a little over $107 / bbl. Crude oil in Colorado and North Dakota was trading between $70-$80 / bbl. Those are big differentials that midstream companies will look to capitalize on. Rail is the easiest, but pipeline developments will follow. Plains also has an extensive NGL rail network and expects to have as many as 6,700 rail cars under lease by year-end 2013.

Plains All American Pipeline's company wide crude oil loading capacity is now 250,000 b/d and unloading capacity is 335,000 b/d on the East Coast, Gulf Coast, and West Coast.

Read the full press release at paalp.com

Continentals First Well the Three Fork's Third Bench Impresses

Bakken Petroleum System - CLR

Continental Resources announced results from its first well test in the third bench of the Three Forks formation. The Charlotte 3-22H flowed 953 boe/d at 1,700 PSI on a 28/64th choke. The well was drilled to a total depth of 21,324 ft in McKenzie County, ND. A 9,701 ft later was drilled and completed with Continental's standard 30 stages. This unit is the first in the Bakken to have three wells producing from three separate producing horizons.

Continental first began drilling the Three Forks (TF1) commercially in 2008 and began drilling the second bench (TF2) in 2011. This marks a successful test of the third bench (TF3) and the company plans to test a fourth bench (TF4) in 2013. A total of 14 wells are planned by the end of 2013 that will test the TF2, TF3, and TF4 formations. If all four benches prove successful, we'll see the company test a 14 well unit not long afterward.

The company has trumpeted the ultimate potential of the field and this discover isn't going to slow them down. Prior ultimate recovery estimates were based on an original oil in place number of 577 billion barrels. Recent wells in formation not accounted for have now boosted the company's estimate to 903 billion barrels of OOIP.