In Dakota Oil Patch, Trains Trump Pipelines
Flexibility of Shifting Crude to Higher Priced Markets Strands Proposed Projects
By Alison Sider
Moving North Dakota’s oil riches out of state on trains was supposed to be a stopgap solution until pipelines could be built.
But even as crude gushes from the state’s Bakken Shale at a rate of nearly 1 million barrels a day, some pipeline companies are abandoning proposed projects, and it is becoming clear that rail transport won’t be a temporary phenomenon.
In January, Koch Pipeline Company walked away from a project because of what it said was tepid interest by local oil producers. A year earlier Oneok Partners LP canceled plans for a $2 billion pipeline from North Dakota to Oklahoma for the same reason.
Rail is almost always a more expensive way to transport crude than pipelines—as much as twice the price a barrel over similar distances. But in North Dakota’s case, rail’s greater flexibility to ferry oil to where it fetches the highest price trumped the economics of pipelines, said energy experts.
The abandoned pipeline projects could have tied into existing and proposed lines bringing oil to refiners in Texas and Louisiana, a market already awash in oil from nearby shale fields.
Ethan Bellamy, an analyst at Robert W. Baird & Co., said producers want the ability to sell oil flowing out of the Midwest to the highest bidder—often refineries in Washington state, New Jersey and Pennsylvania that are only accessible by rail.
“Making a pipeline volume commitment is like getting married. Shipping by rail is like a one-night stand,” said Baird’s Mr. Bellamy. “Right now I suspect producers would rather stay bachelors.”
In part, the crude produced in North Dakota is a low-sulfur type that is highly prized right now among East Coast refiners. On average, the state’s oil sold for $74 a barrel in January, much less than the about $104 a barrel that East Coast refineries paid to import overseas oil during the same month, according to state and federal data. Even with the between $5 and $15 a barrel cost of shipping crude via train, it still made economic sense to head east.
Greg Garland, chief executive of U.S. refiner Phillips 66, said while demand for Bakken crude is greatest along the East and West Coasts, that’s not where proposed pipelines are headed. “We don’t think you’ll see pipelines going east and west,” he said.
Trains also can reach refineries that pipelines cannot, saidTad True, a vice president at True Cos., which operates pipelines in North Dakota and Wyoming. That flexibility means there is little incentive to build or expand lines to carry oil from North Dakota, Mr. True said. His company believes new pipeline construction will largely be to connect the network of pipes already in the ground to rail systems—so they fit together more seamlessly, he added.
Train operators including BNSF Railway Co. and Union Pacific Corp. moved nearly three-fourths of all the oil pumped in North Dakota in December, according to the latest state estimates. That same month, crude oil flowing through pipelines slumped 2%.
The state agency formed to facilitate pipeline development estimates that even after the handful of new pipelines currently under construction start transporting oil in 2016, well over half of North Dakota’s crude oil shipping capacity will remain on the rails.
One major pipeline company hopes to buck the trend. Enbridge Inc. is building a new line that would carry as much as 225,000 barrels of oil a day out of North Dakota when it goes into service in 2016. Marathon Petroleum Corp., which operates refineries in Detroit, Mich., Canton, Ohio, and Catlettsburg, Ky., has agreed to help foot the $2.6 billion construction bill and provide much of the oil in exchange for a 27% stake in Enbridge’s North Dakota pipeline network.
Helping keep hopes alive for more such projects is the congestion and the potential hazards on rail shipments leaving the area. Oil tanker traffic has stressed parts of the rail system unaccustomed to hauling such large volumes of crude. In the past year a string of derailments—one deadly—caused massive explosions.
Last week, the U.S. Transportation Dept. issued new rules requiring that Bakken crude be tested before it is shipped on trains. The American Association of Railroads also agreed to a number of voluntary safety measures for transporting crude, such as lowering some speed limits and redirecting trains around high-risk areas. Still, the new regulations aren’t expected to be costly or create a burden on oil companies that want to rail North Dakota crude, said Wells Fargo energy analystRoger Read.
But in the long run, producers say they would like more pipelines build. “Our philosophy is that pipelines are the best transportation solution, because it takes traffic off the road and you’ve seen the consequences of the burden on the railroad system,” Whiting Petroleum Corp. spokesmanJack Ekstrom said.
—Russell Gold contributed to this article.