Rail has been integral to moving Bakken crude out of the basin since 2012 when production very quickly outstripped pipeline takeaway capacity, causing differentials to blowout as wide as $49/Bbl between Bakken field prices and Brent. As designated by the yellow shading in the graphic below, the historical cost of moving Bakken to Gulf Coast, West Coast, and East Coast markets via crude by rail ranged between $7/Bbl and $18/Bbl, creating a significant arbitrage opportunity for Bakken crude by rail movements.
Bakken crude by rail facilities allowed crude to flow to the East and West Coast refining complexes which remained isolated from growing domestic crude production due to a lack of pipeline connectivity. Bakken crude by rail volumes quickly sky-rocketed to 700 Mb/d and, even in June, provided almost half of the light supply into the 1 MMb/d light refining market on the East Coast. Previously, pipeline constraints in the Permian and the Eagle Ford had created wide differentials in the Gulf Coast as well, which once supported Bakken to Gulf Coast crude by rail movements. However, as Permian pipeline projects like Longhorn and Sunoco’s West Texas Gulf expansions added significant takeaway capacity in mid to late 2013 to the Gulf Coast, it became more difficult for the Bakken to compete into the Gulf Coast markets and as a result, Bakken to Gulf Coast crude by rail volumes have been declining since mid-2013.
After prices collapsed late last year, the spread between WTI, Brent, and Bakken field prices have tightened, challenging the economics of rail. The arbitrage opportunities created by using crude by rail to capture the spread between WTI and Brent are all but eliminated. Producers are trying to minimize loses, and for many, that means moving more crude via pipelines. While pipeline capacity has been limited for years now, historically, Enbridge’s pipeline from North Dakota to Clearbrook, MN, has had spare capacity when Brent and WTI spreads were wide and rail to the East Coast was a more profitable option.
However, when spreads collapse, as they did in the summer of 2013 and now, flows on this pipeline increase. Pipelines are typically a cheaper mode of transportation and when Brent/WTI differentials are at sub $5/Bbl, crude by rail margins are razor thin.
Over the next few years, projects like Dakota Access and Enbridge’s Sandpiper will add over 675 Mb/d of new pipeline takeaway capacity to the Williston Basin and will likely disrupt traditional rail flow patterns . The addition of these pipelines will create an overbuild of infrastructure in the Williston Basin, and as rail and pipelines compete for volumes, Williston Basin differentials are likely to remain tight, squeezing the margins of shippers. The story of Bakken infrastructure mirrors that of the Northeast – firm commitments that were once viewed as an asset will soon become a liability.
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