Pipe dreams? Shipping crude by pipeline has future in Bakken despite a formidable competitor
DICKINSON — As crude oil pipelines play catch-up, they need more than to just build out the capacity to compete with rail — they need to be strategic about it.
When pipelines lagged behind as Bakken crude boomed and rail became the No. 1 mode of transport, shippers saw rail’s benefits: flexibility in where to go and when to hop aboard.
“I think people understand that once you actually build a pipeline and you get shipper support for it, it’s cheaper than rail,” RBN Energy analyst Sandy Fielden said. “The key issue is whether it’s pointed in the right direction or whether it’s taking the oil to the right market.”
Rail was a backup transportation option for when Bakken production spiked and pipelines reached their max. But now, shippers have seen that perhaps the grass is greener, and the pipeline industry needs to work to level the playing field — 72 percent of North Dakota oil was transported by rail in January, while pipelines transported that much as recently as 2007.
“I think people thought it was just a temporary workaround but they’ve recognized that, ‘Hey this still is actually very useful,’” Fielden said of rail.
With the country’s more flexible rail network, producers can choose their market as different oil markets look more attractive — with Brent listing higher, they might want the oil to go to the East Coast. If West Texas Intermediate crude is higher, it’ll likely head south.
With flexibility — a big benefit rail now has that pipeline doesn’t — the future of pipelines might include planning them more around “hubs,” and lessening the commitment periods to stay flexible, industry experts say.
And that market volatility, a product of rapidly increasing production, won’t be around forever. While rail may always have the upper hand in certain markets, many predict pipelines to be the major form of transport sometime down the line.
Flexibility is key
Every day, companies watch oil prices and hunt for the market that’ll give them the best price for their oil.
That’s the reason for the fluctuation on pipeline and rail traffic, said Ron Ness, president of the North Dakota Petroleum Council.
When volatile market prices drive a producer’s decision on where to send its oil, flexibility is key.
Operators make most transport decisions based on where oil will get the best price, minus transportation costs. So even though pipelines are a cheaper mode of transport, wide enough price differentials mean rail’s flexibility is a more viable option.
Continental Resources’ Jeff Hume, vice chairman of strategic growth initiatives, cited the philosophy “economics first and logistics second” in a statement.
“The market served by the rail or pipeline less total transportation charges determines where we move the oil each month — and these can change,” he said.
So to compete with rail’s flexibility, some predict pipelines will shift to sending oil to “hubs” where it can get on other pipelines and go to different markets.
“You’re gonna see pipelines going to more targeted markets where they can get those barrels to other markets,” Ness said. “... That’s ultimately how those pipeline projects are gonna evolve.”
Enbridge’s 610-mile Sandpiper line, for example, will bring oil from the Bakken to Duluth, Minn., where the oil can go via other routes to Detroit or Toronto.
“There’s a lot of market options once you get that barrel to Duluth,” Ness said.
Justin Kringstad, director of the North Dakota Pipeline Authority, said two pipeline projects are expected to be online later this year that will bring crude from the Bakken to Guernsey, Wyo., where “it’ll hop on another pipeline.”
North Dakota Public Service Commission Chairman Brian Kalk said this flexibility may be what pipelines need to level the playing field.
“First off, if you have people shifting to rail because the pipelines aren’t available, that’s something you can fix … over time,” he said. “But if they’re going to rail because they want to keep that market flexibility, if you can develop a pipeline array that lets you keep the market flexibility … you’ve taken away the reason they want to go to rail.”
More flexible commitment periods for oil companies
Pipelines are not only geographically less flexible, they also need more promises before they’re built out — commitments of up to 15 years.
It’s another advantage rail has over pipeline — rail terminal costs are in the millions; pipelines in the billions, requiring much more commitment up front from producers already hesitant at shaky market conditions.
So now, along with trying to reach more markets, pipeline planners are trying to ask for less.
“You have to make a commitment, and it’s typically 10 years, but that’s become more flexible with some of the newer projects (that) are only asking for five-year commitments,” Fielden said.
Fielden points to the five-year commitment period Enbridge made available for Sandpiper, and how it left a larger-than-normal chunk of its capacity for “walk-up” users, he said.
It’s an answer to criticism about the long commitments required, Fielden said.
“If there are ways to provide some more flexibility, some more options in the way that those barrels get committed, that’s just gonna help on the front end of the project,” Kringstad said.
Keystone XL a turnoff
The delays seen by the proposed Keystone XL, which has faced years of regulatory setbacks and environmental opposition, also may have dissuaded midstream companies and producers from pipelines.
“I think oil producers generally want to try to put things in pipelines but with the frustration that’s been had with the Keystone line and others, they’ve made the move to rail,” Kalk said.
The line would connect Alberta oil sands production to Gulf Coast refineries, picking up about 100,000 barrels of Bakken crude along the way each day.
“I wonder if all of the negativity surrounding the Keystone XL debate has somehow undermined the industry’s confidence in the ability to permit new pipelines,” said Brigham McCown, administrator of the Pipeline and Hazardous Materials Safety Administration under President George W. Bush.
“I really wonder if that project being tied up for five years has affected companies’ attitudes.”
But Kringstad said the Keystone XL, crossing an international border, is in its own category.
Some are also just waiting on the Keystone XL — Kalk said he’s heard from several producers who would want more pipelines in North Dakota once they could feed into the Keystone XL.
East, West Coasts still only served by rail
As much as it was a fallback option to start with, rail will always have a spot in the oil transportation industry.
No matter how hard they try to catch up with rail, pipelines won’t reach the East and West Coast markets for a while. While industry experts in North Dakota hope and predict pipelines will become the main method of shipping oil sometime down the line, there are places rail will always be relevant.
“The principal constraint on the pipeline system — which is where rail kind of has a longer-term future — is there’s no pipelines to the East Coast and West Coast,” Fielden said.
Pipelines have been pitched out east but haven’t garnered much interest. Few have even been proposed going west.
The Rocky Mountains are a barrier one way and pure population density is an obstacle the other.
“Rail’s not going away because these refiners on the coasts can displace crude oil from the Middle East or from Africa — which cause higher transportation costs — with Bakken barrels,” Ness said.
Certain markets will likely never be served by a pipeline from North Dakota, Kringstad said, leaving rail as the only option for crude.
Rail’s flexibility will always beat that of pipelines in certain cases, too.
“If you’ve got extra barrels coming out and you’re drilling new wells, the rail option is not just flexible as far as where you send it to, but it’s (also) very easy to expand,” Fielden said.
Most agree that crude oil pipelines will see their day to shine.
“The issue at the moment is there’s a lot of change going on,” Fielden said. “There’s a lot of volatility and people don’t really know which way to go and … (the) rail option is very attractive because of its flexibility.”
Eventually, though, markets will settle and pipelines’ cost efficiency will be enough to compete with railroads.
“There’s a good future for crude oil pipelines,” Fielden said.
Kyle Potter contributed to this report.