Is Bakken Oil More Flammable?

Plains Crude By Rail Costs
Plains Crude By Rail Costs

Bakken oil is produced at a high quality that makes it easier to refine into commercial products and makes it easier to ignite.

There is nothing new about oil being flammable. The science has been the same for well....forever. At a point a few decades ago, light-sweet crude (WTI) was the dominate oil quality in the U.S.

Light oil production growth in the Bakken, Eagle Ford, and Permian isn't something the industry has never seen or handled, but it is an unforeseen boom bigger than anyone expected.

Now that trains are moving the oil on a larger scale, it's important the terminals and rail companies meet high standards to ensure safety.

The flash point or lowest possible temperature at which the oil can be ignited is lower for Bakken oil than it is for tar sands coming out of Canada. That fact led the DOT to issue a Bakken Shale Oil Shipping Safety Alert last week.

What's Important to Ensuring Safety in the Bakken?

In short, the answer is YES. Bakken crude is of high quality and more flammable than lower grade crude oil, but that's nothing new and shouldn't be a shock. Emphasis needs to be placed on classifying the crude correctly (which it hasn't been shown that there is a problem there) and making sure the railroads are as safe as possible.

Additional safety measures need to be taken when hydrogen-sulfide or other flammable gases are dissolved in the oil. The oil needs to be degasified before transportation.

The other thing we can do as voters - Make sure pipelines can be built where needed without undue obstacles. The track record speaks for itself - pipelines are the safest and most efficient way to move hydrocarbons.

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Indigo Resources Building Bakken Rail To Barge Facility in Osceola, AR

Rail to Crude Barge Facility Osceola AR
Rail to Crude Barge Facility Osceola AR

Indigo Resources Ltd plans to build a rail to barge facility in Osceola, Arkansas, to improve movement of Bakken and Canadian crude to Gulf Coast markets.

A 610-acre site at mile marker 784.5 on the Mississippi River will have 3,000 ft of river frontage, three sets of manifolds, five rail loops, and 16 miles of track with room for 100+ car unit trains. The site has direct rail access to Minot and Tioga, with shipments moving as much as three times faster than long rail hauls to the Gulf Coast. Increased speeds lead to higher tank car utilization or to put it another way - cost savings. Deliveries are expected to take less than 10 days and savings is estimated at $1-2 per barrel compared to rail alone.

Tomas Fuentes, project manager, stated "Unit trains will be able to come directly from Minot or Tioga without hitting any rail yards or switching stations."

A total of 15 refineries with 3.4 million barrels per day of demand is downstream of the site on the Mississippi River.

The terminal will have the capacity to unload two unit trains of light crude per day and three to four manifest trains of bitumen per week.

"Combining rail and barge will lower the overall cost to the market" explains John Park, Director of Indigo Resources Ltd. "Plus due to our location, Indigo will be able to turn around the unit trains faster and in today`s high cost of rolling stock, this is an added bonus."

The terminal will allow for crude movement to the lower Mississippi at cheaper rates than rail. The terminal will have a total of two million barrels of storage capacity:

  • 4 x 250,000 bbl tanks
  • 10 x 100,000 bbl tanks

The facility will be flexible enough to handle multiple crude types and Indigo Resources expects deliveries from Canada, Colorado, Montana, North Dakota, and Wyoming.

Construction is expected to begin in the fourth quarter of 2013 and the facility should be in service in late 2014.


Bakken Crude Can Get Premium Prices on the West Coast

Tesoros Carson Refinery
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.

Statoil Bakken Crude Moving by Rail - Leasing 1,000+ Railroad Cars

Statoil's crude production from the Bakken is gaining additional capacity out of the region. The company plans to lease 1,000+ railroad cars to help alleviate transportation bottlenecks. The number of railcars leased will give the company capacity to move up to 45,000 b/d. That's more than Statoil produces, but the railroad cars can act as a form of storage as well. With railroad cars, the company has the option to sell crude in Canada, the East Coast, or the Gulf Coast. With discounts that stretch as high as $20 per barrel locally, it's easy to rationalize making this investment. Pipeline capacity constraints plague North Dakota and Montana because local demand is far outstripped by supply. Many operators are finding the Gulf Coast market offers the best price realizations (Louisiana Light Sweet Prices). WTI is largely being bypassed for other demand centers. Cushing, where WTI is priced, is addressing its own problems, so Canada and the coasts are better destinations.

Nowhere is the challenge more apparent than in North Dakota, which this year unseated Alaska as the country's second-largest oil-producing state. In May the state produced 639,000 barrels per day, or about 10% of the oil produced in the U.S., up from 364,000 barrels per day in May 2011, according to the U.S. Energy Information Administration.

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