The Bakken Buck Starts Here – Bakken Crude Pricing Part III

Bakken crude oil has traded at an $8-$10/Bbl discount to WTI for the past few weeks, and a few times since January this year has  blown out to more than $20/Bbl.  We talked about some of the reasons for this volatility in the first two installments of “The Bakken Buck Starts Here”, covering the mysteries of crude postings and pipeline hub pricing. Ultimately however refiners are more concerned with delivered crude oil prices. Today’s installment of The Bakken Buck Starts Here – Bakken Crude Pricing Part III compares delivered crude costs to four US refining centers.

To recap our series so far: The Bakken Buck Starts Here- Bakken Crude Pricing Part I uncovered the mysteries of crude postings and gravity adjustments. Part II looked into pipeline hub pricing at Clearbrook MN and compared those prices to the crude postings available in North Dakota. If you are new to this series, you might want to catch up by reading those blogs first. Today in Part III – we estimate relative transport costs to deliver Bakken crude to US refining centers in the Midwest, Houston, St James LA, and the East Coast.

There are three options to move crude oil out of the Bakken – trucks, trains and pipelines (although as we shall see, if you travel far enough you hit water and can bring barges into the mix). We are not going to say much here about trucks except to factor in their cost when shippers use them to deliver to pipeline or rail receipt points. Pipelines are the least expensive way to transport crude but permitting, right-of-way approval and construction take a long time and they cost a lot to build. Building receipt and delivery rail infrastructure is less expensive than pipelines and the North American rail system is flexible enough to allow connection to virtually any destination.  As we learned in (Bakken: if Railing Crude is Wrong I Don’t Wanna Be Right) there are numerous train expansions being planned to rail crude out from the Bakken and many of these will survive subsequent pipeline expansion because of their flexibility and long-term contractual commitments.

The analysis that follows is based on publically available cost estimates and assumptions that we have made to provide an indication of how Bakken crude delivery costs to four refining centers compare. In reality, transportation costs are negotiable and factors such as volume and term play an important part. The purpose of the examples here is to show how delivery costs change crude price dynamics the further you get from the wellhead.

Pipeline to the Gulf Coast

As we discovered in Part II, if they are lucky enough to have shipping capacity, companies producing or gathering larger crude volumes in the Bakken Shale can deliver their barrels to the pipeline hub trading markets at Clearbrook MN or Guernsey WY (for map see A Perfect Storm) for onward shipment to Cushing, OK, the midcontinent, the Rockies and the Gulf Coast. We also learned that these pipelines are full to capacity and that Bakken crudes compete with Canadian barrels for any spare room available. Nevertheless, we’re going to estimate two pipeline costs - from Clearbrook to the Gulf Coast and from Guernsey to the Midwest (Wood River, IL) just to indicate the delivered costs to these locations if you are lucky enough to find space on the pipeline.

We learned in Part II that gathering costs from the Bakken to Clearbrook via the Enbridge North Dakota pipeline system are in the $5 range depending on trucking costs. Published Enbridge pipeline tariffs from Clearbrook to Flanagan IL on the Lakehead system and then Flanagan to Cushing on the Spearhead pipeline are around $2.50/Bbl depending on shipper status. That puts the cost of delivering Bakken crude by pipeline to Cushing at $7.50/Bbl. The newly reversed Seaway pipeline from Cushing to Freeport, TX delivered its first barrels nearly two weeks ago on June 6, 2012. Seaway opens up a route for Bakken crude to the US Gulf coast refining center around Houston. We have heard Seaway estimated tariffs in the $3-$4/Bbl range with the lower price being available to shippers with reserved capacity. Total pipeline cost from the Bakken to the Gulf is therefore estimated to be ($7.50 to Cushing + $3 to Gulf Coast) = $10.50/Bbl.

Pipeline to Wood River IL

A second, more circuitous pipeline route out of the Bakken is west and south on the Belle Fourche and Butte pipelines to the Guernsey Wyoming hub.  From Guernsey, crude can be shipped to the large Midwest refining center at Wood River IL via the Kinder Morgan Platte pipeline. Total transport costs out of the Bakken to Guernsey including gathering are estimated at about $4.00/Bbl (source Belle Fourche). The pipeline tariff from Guernsey to Wood River is $1.69/Bbl. Total delivery costs to Wood River are therefore estimated to be ($4.00 + $1.69) or $5.69/Bbl.

Trains and Barges to the East Coast

Refiners on the East coast have been hurting lately because the cost of their imported crude is linked to expensive North Sea grades like Brent. The low relative price of US domestic crudes makes them an attractive alternative for east coast refiners except for the lack of crude pipeline infrastructure into the northeast.

That hurdle was apparently not high enough to stop good old American ingenuity however, so as reported in (Rail it On Over to Albany) shippers are moving crude north out of the Bakken into Canada by truck, then via rail to Albany New York where it is transferred to barges and shipped down the Hudson river to east coast refineries at Philadelphia. In a June 5, 2012 presentation to analysts at the Citi Global Energy Conference, Marathon Oil Company estimated the cost of this odyssey to be $24/Bbl. See table below for the detailed cost breakdown.

Source MPC Estimate

Trains to St. James LA

Although in my book the addition of barges into the mix gives Bakken East Coast crude shippers the edge as far as the Carmen Santiago factor goes, it’s not that far off the silly scale to think about shipping crude by train from North Dakota to Louisiana. Nevertheless, refiners connected to St James LA are paying nearly as much for their crude as the embattled East Coast refiners and that is upwards of $20 higher than the cost of WTI Cushing. With Bakken crude prices being discounted against WTI by the crude logjam at Cushing, the economics window to move Bakken crude to the Louisiana Gulf opens up. Marathon once again did the math and estimated the transport costs at $20.75/Bbl (see table below).

Source MPC Estimate

Transport Cost Comparisons

Finally let’s bring transport and crude costs together into a comparative table (see below) that shows you the estimated delivered cost of Bakken crude to our four refinery destinations. This table is a bit tricky to navigate so I’ll take you through it step by step.

First a few words about the crude costs in the first row of the table. These are estimated crude costs that we will add to the transport costs we have just discussed in order to arrive at a delivered crude price to each of our refining centers. We assume that crude delivered from Clearbrook is purchased at the Clearbrook pipeline-trading hub that we described in Part II. Likewise, crude from Guernsey is priced at that trading hub. Of course, many shippers will be transporting their own crude or crude they purchased at posted prices so they have different costs. We assume that the crude that travels to the East Coast and to St James was purchased at a posted price because that crude never sees a pipeline. Marathon’s cost estimates (see first two tables above) factor in all the gathering costs for these crudes. Remember folks, these are just estimates!

Now look further down the table.  Each color-highlighted row represents a delivered price estimate for a different crude route out of the Bakken. The first (yellow highlight) is crude delivered via Clearbrook down through Cushing onto the Seaway pipeline to the Houston Gulf coast. The crude cost is a May average at Clearbrook, the transport cost is $10.50/Bbl and the delivered cost to Houston is $102.10. The second smaller table immediately below shows the comparable May month average costs of WTI and Brent for reference. At $102.10/Bbl Bakken competes with Brent ($110.29/Bbl) at Houston but not WTI ($94.55).

Next up is crude delivered by pipeline via Guernsey to Wood River (turquoise highlight). The delivered cost is the Guernsey pipeline price plus $5.69/Bbl transportation – a total of $96.69. Given that our comparative WTI price ($94.55/Bbl) would incur some delivery costs to Wood River, the Bakken crude is very close to WTI. Brent is not really a competitor crude at Wood River since few if any seaborne barrels are now being delivered into the Midwest.

Crude delivered by rail – either to the East Coast or St James LA was assumed purchased at the Bakken Williston Sweet posted price (May average = $73.60/Bbl). Transport to the East Coast (green highlight) is $24.00 meaning a delivered price of $97.60/Bbl. This price is attractive versus Brent ($110.29) and would almost certainly undercut WTI ($94.55/Bbl) since delivery costs from Cushing to the East coast would exceed $3.05/Bbl.

Rail delivery to St James LA (pink highlight) is estimated to cost $20.75/Bbl so adding our Bakken posted average for May ($73.60) gives us a delivered Bakken crude cost of $94.35. Despite high transport costs, the low Bakken posted price makes the delivered cost competitive against Brent ($110.29) the benchmark crude for this market..

Conclusion

As we have said, the examples given here are just indicative of the delivery costs to our four major refining centers. The analysis does show however that doing the math on delivery costs is critical if producers want to get the best price for their crude in an oversupply situation. The fact that shippers are actually experimenting with complicated rail options to reach markets where Bakken crudes are more competitive shows that this is a useful exercise. The final element in the pricing equation is the relative refining value of crudes in different markets and that’s where we are headed in Part IV.