Increasing Pipeline Capacity Could Mean Bakken Crude Oil Trains Will be Gone After 2017

Tank car trains carrying crude oil through Northeast Ohio may seem ubiquitous today, but they might be gone by 2017 if an analysis conducted by a Houston-based consulting firm comes true.

RBN Energy LLC made the prediction on its blog and it was picked up by Railway Age.

Increasing pipeline capacity combined with falling crude oil prices has depressed the level of Bakken crude oil being shipped by rail.

The falling prices have reduced the price differences between international and domestic sources of crude oil.

“Since 2012 a combination of rail and pipeline has given Bakken producers ample crude takeaway capacity but pipelines alone have not had sufficient capacity on their own,” said RBN’s Rusty Braziel in an interview with Railway Age. “However, with production slowing down, pipeline capacity is catching up and by 2017 there should be enough pipelines to carry all North Dakota’s crude to market.”

But Sandy Fielden, the author of the blog post, said the situation is more complicated than that.

“ . . . just because pipeline capacity is available doesn’t necessarily mean producers will prefer to use that capacity instead of rail,” Fielden wrote. “In the long run – assuming that they do not have other overriding obligations – shippers will look to their crude netbacks at the wellhead to decide where and how to send their crude to market. That means they should favor market locations where the combination of crude sales price less transport is the highest – regardless of transport mode.”

Fielden, who is RBN’s director of energy analytics, wrote that wide price differences between North Dakota Baaken crude oil and crude from overseas made rail the ideal option for producers sending it to the East or West Coast because there was no pipeline capacity in those regions.

“As soon as price differentials—especially between domestic benchmark West Texas Intermediate and international benchmark Brent—narrowed, then barrels shifted back to pipelines to take advantage of their cheaper tariff rates,” Fielden wrote. “Yet significant crude volumes continued to be transported to market from North Dakota by rail because pipeline capacity could not handle the demand.”

But more pipelines have been built or are being planned in North Dakota that would provide space for all the barrels currently traveling to market from North Dakota by rail.

Fielden’s analysis found that new pipeline projects due to go into service during 2016 and 2017 will expand Bakken takeaway pipeline capacity by 680,000 barrels per day.

Another 100,000 barrels per day of pipeline capacity would come online in 2019 if the TransCanada Keystone XL pipeline is completed, with 220,000 barrels per day more in 2020 if the TransCanada Energy East project is built.

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