Washington — Bakken Shale News

We've noted Bakken Oil can get premium prices on the West Coast before and more crude is making its way that direction. Most of the oil is moving by rail, but it is not being railed all the way to California.

Most of the oil is unloaded at ports in the Pacific Northwest, put on barges, and sent south to refineries. Some is consumed locally.

Tesoro ships oil from the Bakken to its refinery in Anacortes, Washington.
Tesoro & Savage are building a 120,000 b/d rail to marine facility in Vancouver, Washington.
A mothballed ethanol plant that is being used as a Bakken oil terminal in Oregon.

There are other projects that might come to fruition as well. Oil moving west is likely going to be a mainstay in North Dakota and Montana.

In total, there are 10 rail terminals planned or under construction in Washington and Oregon. One Tesoro facility has been completed in Anacortes, WA. Others include:

2 in Anacortes, WA
2 in Ferndale, WA
1 in Tacoma, WA
3 in Hoquiam, WA
1 in Vancouver
1 in Clatskanie, OR

It's an interesting development to watch.

While pipelines are the cheapest, safest, and most efficient way to move crude, rail has become competitive due to price differences around the country and barriers to building pipelines. Pipelines face significant regulatory scrutiny and high initial capital costs.

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.