A Canadian Pacific tank train - Date unknown Canadian Pacific.

3 May 2012

Bakken Oil Fans Refinery Rail Rush

North America - U.S. East Coast refineries struggling to cut costs are turning to railroads to ship in Bakken oil from North Dakota trading as much as 39 percent cheaper than Brent.
 
About 250,000 barrels a day from other locations in the U.S. and Canada, equivalent to 27 percent of East Coast refinery crude inputs, may be moved within the next year as rail terminals in New York, New Jersey, and Virginia expand or open, according to data compiled by Bloomberg. Bakken has averaged US$27 a barrel less than Brent, the benchmark grade for East Coast imports, in the past year and was US$46.25 cheaper on 9 Feb 2012.
 
Growing rail shipments underline how rising U.S. production is reducing the nation's dependence on foreign oil, easing the pain for companies from Delta Air Lines Inc. to Sunoco Inc. that have been hurt by the rising price of Brent. The benchmark grade, used to price about two-thirds of the world's oil, has gained almost 10 percent this year, contributing to a wave of refinery closures on the East Coast.
 
"If you introduce enough of this oil, especially by the end of the year when you blend for winter gasoline, you will see a significant pullback in price," said Stephen Schork, president of the Schork Group in Villanova, Pennsylvania. "That's 250,000 barrels a day of demand for Brent that is potentially destroyed and will have to find a home elsewhere."
 
Bakken oil closed at US$103.22 a barrel yesterday, a discount of US$14.98 to Brent. The North Dakota grade has traded at an average discount of US$26.93 to the global benchmark this year, according to data compiled by Bloomberg. WTI for June delivery settled at US$105.22 a barrel on the New York Mercantile Exchange and was at US$104.89 at 12:40 p.m. London time today.
 
Delta Refinery
 
Delta, which will pay US$180-million to Phillips 66 for the Trainer refinery in Pennsylvania, plans to begin jet fuel production at the site in the third quarter. Pennsylvania's state government is putting up US$30-million in assistance to defray the purchase expense.
 
Delta said there may be a "future upside" in processing domestic oil. Sunoco, which agreed to a takeover by Energy Transfer Partners LP 30 Apr 2012, extended the deadline to idle or find a buyer for its Philadelphia plant as an influx of cheaper crude raised the prospects of a decline in operating costs. Sunoco is in talks with Carlyle Group LP.
 
Global Partners LP, a fuel marketer, began moving a first load of oil from North Dakota in October and received 15 unit train shipments of Bakken at its Albany, New York, terminal in the first two months of this year. The oil is transported by barge south down the Hudson River to regional refineries.
 
The terminal will be able to offload two 120-car trains a day when the expansion is complete by late summer, Eric Slifka, chief executive officer of Waltham, Massachusetts-based Global Partners, said last month. The company is now moving domestic and Canadian grades to the site.
 
Rising Supply
 
U.S. oil output, boosted by drilling in shale formations such as North Dakota's Bakken and Texas's Eagle Ford, rose to 6.14 million barrels a day in February, the highest monthly total since August 1998, the Energy Department said 27 Apr 2012.
 
Midwest refiners converting plants to process more heavy oil will reduce demand for light, sweet crude by 420,000 barrels a day, said Ed Morse, the global head of commodities research at Citigroup Inc. in New York. Incremental output into that region will also help contribute to a surplus of low-sulfur oil, he said.
 
"You effectively have an increase in supply of light, sweet crude of some 700,000 barrels a day over the course of a year," Morse said in a telephone interview.
 
It's this type of oil that U.S. East Coast refiners process and have been paying extra to get from overseas. They imported about 96 percent of the crude they processed in the past year, including supplies from Canada, Energy Department data show.
 
Oil by Rail
 
Plains All American Pipeline LP's rail terminal in Yorktown, Virginia, will be completed by the second quarter of next year, the company said in a 28 Feb 2012 filing. The terminal will have a capacity of 60,000 barrels a day, Chief Executive Officer Greg Armstrong said in a 8 Feb 2012 conference call.
 
NuStar Energy LP is reviewing plans to boost rail shipments of Canadian oil to its 74,000-barrel-a-day Paulsboro, New Jersey, asphalt refinery, according to Greg Matula, a San Antonio-based spokesman.
 
Sunoco's Philadelphia refinery processes an average 10,000 to 20,000 barrels a day of oil transported by train to the company's Eagle Point terminal in New Jersey, according to an estimate from Andy Lipow, president of Lipow Oil Associates LLC in Houston.
 
Thomas Golembeski, a Philadelphia-based spokesman for Sunoco, declined to comment on the rail shipments in an 20 Apr 2012 e-mail.
 
Fuel Bill
 
About 87 percent of the 7.6-million barrels of oil Sunoco imported in February to the Philadelphia refinery was Brent-based crude, according to the Energy Department.
 
Delta, whose daily 2011 fuel bill was $32 million, expects to refine Brent oil or equivalents "but the potential for transportation of domestic crude" to the Trainer plant could boost future profits, the company said in an 30 Apr 2012 filing. About 83 percent of the 5 million barrels the refinery imported in August, the last full month it operated, was African crude based on Brent.
 
The economic rationale for buying either plant is based on accessing "price-advantaged crude from the mid-continent," John Auers, senior vice president of Turner Mason & Co., a Dallas-based energy-consulting firm, said 18 Apr 2012 by phone.
 
WTI Discount
 
Rail shipments to East Coast refiners may narrow the discount for West Texas Intermediate versus Brent because of increased demand for domestic oils and a diminished need for West African crudes, according to Schork.
 
Low-sulfur domestic grades such as Bakken oil may sell at a $2 discount to the delivered price of light, sweet oil from West Africa once it reaches the East Coast, according to Morse. Rail shipping costs are probably $16 to $18 a barrel, he said.
 
"It might well impact the economics of East Coast refining," said Morse. "It should make the economics more dependable. Whether it will or not is a function of the individual refineries."
 
Aaron Clark.