Railing in lieu of pipe is expensive and not enough railcars are available, says Dahlman Rose’s Seidl.
Oil production from the Bakken play in North Dakota has now reached some 600,000 barrels per day, up from virtually none just five years ago and some 400,000 a day a year ago, according to John Seidl, director, E&P research, for Dahlman Rose & Co.
Additional new Canadian oil production has put between 2.0- and 2.4 million barrels of oil per day into the U.S. market, up from some 1.8 million a day five years ago, Seidl adds.
And the barely year-old Mississippi Lime oil and gas liquids play in northern Oklahoma and southern Kansas has SandRidge Energy Inc. in an arrangement with Plains All American Pipeline LP to ship out 150,000 barrels a day. Meanwhile, Chesapeake Energy Corp. is in a deal with Semgroup Corp. and Gavilon LLC to send out 140,000 a day, note analysts with Tudor, Pickering, Holt & Co. Securities Inc.
Bottlenecks are growing, Seidl says, as Canadian oil meets with North Dakota oil in trying to get to the U.S. Gulf Coast and both are running into new Oklahoma oil production along the way.
“Producers in Canada and the Bakken are increasingly turning to rail as a transportation option to move barrels,” Seidl says. “For example, in the Bakken, the current capacity to get oil onto rail is 160,000 barrels per day, but, by early 2013, that capacity is expected to increase to 527,000. Hess Corp….expects to generate higher profits from railing crude to the Gulf Coast than it currently receives from selling oil into the pipeline system. Anecdotal reports from Canadian E&Ps suggest they are also using rail to get around the pipeline bottlenecks, as they are working on adding capacity.”
Meanwhile, Canadian oil-sands producers who have been counting on the Keystone XL project to get their oil to the Gulf Coast are looking west, note the TPH analysts. Kinder Morgan Inc.’s TransMountain Expansion (TMX) project will move an additional 300,000 barrels per day by 2016 to the West Coast, up from 300,000 a day currently. “TMX challenges Enbridge Inc.’s larger Northern Gateway (pipeline) for Alberta-to-the-Pacific supremacy as post-XL regulatory uncertainty increases interest in projects that utilize existing pipes, like TMX,” the TPH team reports.
Seidl notes that Canadian oil is now fetching $10 less on the market than U.S. onshore—that is, West-Texas-Intermediate-priced oil—which is fetching $18 less than Gulf Coast or Brent-priced oil or nearly $30 less combined. Meanwhile, railing oil from the oil sands of Alberta to the Houston Ship Channel costs $10 to $14 a barrel.
Seidl says, “There appears to be an opportunity to narrow that gap by arbitraging the differential; the aforementioned cost from Edmonton to Houston suggests there should also be an arbitrage between WTI and Gulf Coast pricing too. However, the mathematical arbitrage does not exist in reality because of the shortage of rail cars.”
In early January, 19,376 North American railcars carried petroleum products, he adds—“the highest weekly traffic ever for the commodity.”
Some relief to producers seeking to get their oil to the highest-priced, Gulf Coast market will come this summer as the existing Seaway pipeline that brings Gulf Coast oil to Cushing, Oklahoma, is reversed, moving 150,000 barrels per day to the Gulf Coast instead and as much as 400,000 a day in 2013.
“Enbridge expects to bring on an additional pipeline from Cushing to Houston in 2014, along with a new pipeline from Illinois to Cushing, which would essentially open up capacity for Canadian crude to reach the Gulf Coast. Another Enbridge project to reverse the flow of oil from Sarnia, Canada, to Montreal by 2014 could also aid in reducing the differential between the Midcontinent and the Gulf Coast. “However, North American oil production likely will also grow sizable volumes during the same timeframe. Other future sources of potential relief would come from approvals to build Keystone XL, Northern Gateway and the TransMountain Expansion,” Seidl concludes.
–Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com. Contact Nissa at email@example.com.
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