Oil production from the 200,000-square-mile Bakken basin, which extends into Montana and southern Canada, is skyrocketing, thanks in part to the use of hydraulic fracturing, or hydro-fracking, a process where a mixture of water, sand and chemicals is blasted deep underground to release oil and natural gas trapped within shale rock.
North Dakota recently became the second-largest oil-producing state in the nation, passing Alaska, and in May it pumped an average of 639,000 barrels per day, a 75 percent increase from a year earlier, according to the U.S. Energy Information Administration.
My recent visit to the Bakken underscored the importance of rail traffic to the region, as this projected long-term boom, still in its infancy, is in dire need of infrastructure to support it.
That means material for the build-out of roads, housing, pipelines, and oil-storage facilities has to be shipped in, in addition to the pipes, machinery, chemicals and sand used in the hydro-fracking drilling process creating high demand for inbound rail traffic, while oil is being shipped out over the same rail network.
Because of the cost and time it now takes to get Bakken crude to the price point for the West Texas Intermediate (WTI) at Cushing, Okla., or to refiners in the Midwest or Gulf Coast, Bakken oil now sells at a discount of $5 to $25 per barrel to the benchmark WTI, a significant loss of potential income to producers.
But the outbound backlog keeps growing, such that more and more oil is being stored in the region as new storage tanks are being raised quickly.
About 62 percent of Bakken crude is shipped out of the region by pipelines now, while about 25 percent currently goes by rail and the balance by truck. That ratio will fluctuate as there are major projects under way to add capacity for both rail and pipelines, but the pipeline work in particular will take years to complete, giving the railroads a leg up for now.
Eventually, it is hoped that TransCanada’s Keystone XL pipeline project, held up by the Obama administration on environmental concerns, will get done and a link to it from the Bakken will be finished and help alleviate the current bottleneck.
TransCanada said in a press release in May that it “expects to begin construction of Keystone XL in the first quarter of 2013, with completion slated for late 2014 or early 2015.”
That would ease some of the pressure on rail traffic, but for now, though, rail still rules. In June, about 325,000 barrels a day were shipped out by rail, more than double the rate from at the end of the year, according to the North Dakota Pipeline Authority.
And the rail carriers are rapidly building on their capacity. For example, Burlington Northern Santa Fe (BNSF) said its recent $197 million investment in rail infrastructure has increased its hauling capacity by 25 percent over the past year, and it now expects to carry 89 million barrels of oil out of the Bakken region this year, up from 1.3 million barrels in 2008.
It reported that its volume of outbound oil railcar shipments jumped 75 percent in the second quarter from a year earlier.
BNSF has said that, eventually, it expects to have the capacity to ship as much as 730,000 barrels of crude daily out of North Dakota.
But that’s not enough for the oil companies, which are going into the transportation business on their own. Last week, the international oil giant Statoil ASA of Norway, now a major player in the region after paying $4.4 billion for the U.S. exploration and production firm Brigham Exploration last year, said it plans to lease 1,000 rail cars to ship its oil.
And, previously, refining firms, including Tesoro, Marathon, and Phillips 66, have been either buying tank cars or leasing tank cars and in some cases dedicated "unit trains," including engines and tank cars, to move oil to their refineries.