As RBN Energy LLC analyst Sandy Fielden describes in Slow Train Coming: The Decline and Fall of East Coast Crude by Rail, the economics of shipping crude oil out of North Dakota’s Bakken region, compared to importing equivalent crude, are having a detrimental impact on crude-by-rail (CBR) shipments to the East Coast.
“If East Coast refiners bought their crude at the wellhead in North Dakota during February 2016, they would have paid average prices of about $4.90/bbl below U.S. Benchmark West Texas Intermediate (WTI) at Cushing, Okla., which works out to about $26.25/bbl. (price estimates from Genscape),” says Fielden. “If they shipped that crude by rail to refineries in Philadelphia on the East Coast, they would have paid about $14/bbl rail freight, meaning the delivered cost of crude would be $26.25 + $14 or $40.25/bbl. Alternatively, they could have simply imported Bakken equivalent light sweet crude priced close to international benchmark Brent for an average $34/bbl, saving a minimum of $6.25/bbl.”
A few key takeaways:
• “Overall U.S. CBR volumes declined 30% in 2015 in response to narrower crude spreads and the buildout of pipeline networks that provided cheaper alternative routes to market. At the same time, the proportion of all U.S. CBR movements being shipped to the East Coast has been increasing, largely because shipments to the Gulf Coast have declined with the buildout of pipelines. Data from the EIA (U.S. Energy Information Administration) monthly rail movements report shows that shipments to Petroleum Administration District for Defense 1 (PADD 1, the eastern seaboard) increased from an average 11% of total U.S. CBR shipments during 2012 to 35% in 2014 and 44% in 2015. The vast majority of those CBR shipments to the East Coast come from PADD 2, which primarily means North Dakota. This sticky market share for CBR to the East Coast has less to do with economics that have largely turned sour and more to do with refiners fulfilling contractual obligations that require them to either ship crude through rail load and unload terminals or pay terminal fees anyway. In the case of East Coast CBR, that means refiners are deciding whether to continue shipping by rail at a loss or just pay the terminal fees and import cheaper crudes to meet their feedstock needs.”
• “Actual CBR shipment volumes to the East Coast peaked in November and December of 2014 at 488 Mb/d (million barrels per day) and have been declining ever since according to EIA—down 33% from their peak by December 2015 (the latest data available). The CBR shipments mostly came from PADD 2, with a smaller volume coming into the East Coast from Canada. CBR from North Dakota increased from 51 Mb/d in 2012 to average 387 Mb/d in 2015, peaking at 465 Mb/d in April 2015 then falling 33% to 312 Mb/d in December 2015. CBR from Canada averaged just 11 Mb/d in 2012, increasing to 69 Mb/d in 2014 and falling to 27 Mb/d in 2015. Some of these Canadian volumes are heavy crude delivered to the PBF refinery at Delaware City, and some are light crude delivered by rail to Albany, N.Y., and then shipped down the Hudson River to the Phillips 66 Bayway refinery in New Jersey.”
• “The fact that a significant volume of CBR is still headed to East Coast refineries in the face of losing economics has a lot to do with the lack of pipeline alternatives into this market. Refineries have invested a lot in terminal infrastructure and throughput agreements to secure inland crude. Over time, we expect that if price differentials continue to favor imported crude, then CBR shipments to the East Coast will continue to decline as rail terminal commitments either expire or are deemed sunk costs that have to be paid anyway.”
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