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Riding the shale rail

Bakken producers take to the tracks; pipeline capacity also on the rise

AS OIL production from the prolific Bakken Shale has ramped up, swiftly outstripping pipeline capacity, producers have turned to the railways to deliver their crude to market. As of December last year, railcars were carrying up to 65,000 barrels of oil out of the region – about 18% of its total production. That figure is expected to rise further as additional rail facilities are brought into service.

Although trains have been used to ship crude oil in the past, expansion of the US pipeline grid made rail transportation less appealing. But when production began in the Bakken Shale in 2008, it quickly exceeded pipeline takeaway capacity. Consequently, Bakken crude was being sold at a discount of as much as 30% to benchmark WTI because of the difficulty moving it to market.

EOG Resources, the second-largest Bakken producer at the time, started trucking crude to the Cushing, Oklahoma, pipeline and trading hub, and other markets, but that boosted the per-barrel cost by up to $25. So, it began building railcar-loading facilities in Stanley, North Dakota, in the heart of the Bakken Shale. The first 10-car unit train left the terminal on New Year’s Eve 2009 for a four-day, 1,000 mile trip to an unloading terminal EOG had built in Stroud, Oklahoma. There, the cargo was transferred to an EOG pipeline for shipment to Cushing, 17 miles away.

Since then, pipeline capacity in the Bakken Shale has expanded significantly, and it continues to grow to handle rising production, which could reach as much as 0.5m-0.7m barrels a day (b/d), some industry insiders say. The US Geological Survey believes the formation could hold up to 4.3bn barrels of recoverable reserves, making it the largest US oilfield outside Alaska, and even more oil is buried in the smaller but equally rich Three Forks Sanish formation beneath it.

In January 2010, Enbridge completed a 51,000 b/d expansion of its North Dakota System, which connects the Bakken Shale to an Enbridge mainline system at Clearbrook, Minnesota; in addition, the company has launched a multi-phase project that will increase takeaway capacity from the region by 145,000 b/d and can be readily expanded to 325,000 b/d.

But that hasn’t quelled interest in transporting oil by rail. Although pipelines can carry crude at a lower cost – about $5-7/b compared with about $9-12/b by rail, one source suggests – trains offer producers access to areas that are not served by pipelines, where pipelines are already operating at capacity, or where crude commands higher prices. On top of this, pipelines take years to plan and build, while a new train terminal can be put into service in a fraction of that time.

Several rail facilities have opened recently or are in development both in the Bakken Shale and in key delivery points. EOG plans to open another terminal by the end of this year, Rangeland also reportedly intends to build a 60,000 b/d terminal in the Bakken Shale, and Hess has plans for a 130,000 b/d rail-shipping facility and hub.

NuStar Energy and US Development both have built receiving terminals in St James, Louisiana, which has access by pipeline and water to deliver to Midwest and Gulf coast refineries; while US Development plans to double the capacity of its facility to 120,000 b/d later in 2011.

Earlier this year, Kinder Morgan Energy Partners and railroad company Watco announced plans to build and operate several rail facilities in important markets, including the Bakken, for loading and unloading crude oil as well as related products such as frac sand, pipe and drilling supplies.

And Watco isn’t the only transportation company to climb on the Bakken bandwagon. Stillwater Central recently opened a rail terminal in the area and Savage Companies has one in the works.

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