Viewpoint: Bakken crude finds myriad suitors

Producers of historically discounted and constrained Bakken crude are enjoying robust differentials and multiple takeaway options even as other basins and hubs feel the pinch.

The Williston basin centered in North Dakota gave birth to the crude-by-rail phenomenon in 2009 as a combination of rising production and demand on the US coasts — first the Gulf, then the west and east coasts — quickly made the legacy pipeline system obsolete. But rail fell out of favor almost as fast, first because arbitrage opportunities dried up, and then in June 2017 when Energy Transfer Partners' (ETP) 525,000 b/d Dakota Access pipeline (DAPL) came on line.

"If Dakota Access were not in service today, any incremental production growth would have to be served by rail," said Justin Kringstad, director of the North Dakota Pipeline Authority.

Dakota Access — layered on top of Enbridge's existing system into the midcontinent and western pipeline systems into Wyoming and potentially the Cushing, Oklahoma, hub — created options for uncommitted shippers that many had not previously enjoyed.

With Bakken crude in demand across the US and beyond, a grade that once priced at large discounts at the Clearbrook, Minnesota, hub has flipped. Bakken Clearbrook, which traded for as little as $16/bl under CMA Nymex West Texas Intermediate (WTI) at Cushing in 2013, sold for more than $2/bl higher than the benchmark late last month.

The price has dropped since then to trade at about a 20¢/bl discount to the benchmark on 12 July.

Bakken Clearbrook traded at premiums to WTI Cushing for most of the second half of 2017, after DAPL went live, before slipping to discounts for most of 2018 until again spiking last month.

"That is enormous when you are looking at what is happening in Midland, Texas, where they are selling at a $9-$19/bl discount," said Lynn Helms, director of the North Dakota Department of Mineral Resources, referring to the growing crude bottleneck in the Permian basin of west Texas and eastern New Mexico.

But prices on the coast are even higher, thanks to a Brent/WTI Cushing spread that has widened this year. Bakken at Beaumont, Texas, the terminus of the Bakken pipeline system that includes DAPL, has priced at or above a $5/bl premium to Bakken Clearbrook since this spring. Pricing at the DAPL origin in western North Dakota runs at a discount to Clearbook, which helps to cover the $5.61-$6.63/bl committed tariff or the $7.51/bl uncommitted tariff as of 1 July.

The current environment — stronger differentials compared with WTI Cushing but widening discounts to coastal grades tied more closely to Brent — has brought rail back into the picture as a viable shipping option, rather than as a requirement.

In April, Bakken values began to strengthen against the benchmark and the 1.28mn b/d of production neared a new record. Rail's share of takeaway jumped to 21pc, or 268,000 b/d, its highest level since the spring of 2017 as ETP's pipeline was nearing service. Rail only took 9pc of Bakken output as recently as December.

"All of those crude movements today I would consider elective," Kringstad said. "It is not a scenario where barrels have to use crude by rail. There are marketing reasons they do that."

Kringstad's agency projects a steady increase in regional crude production through the next decade, to as high as 2mn b/d by mid-2024. For that to happen without renewed large discounts, more outbound pipeline capacity will be needed.

"A year from now, if production increases as expected, we will move from an elective use of crude by rail to a forced use of crude by rail," Kringstad said.