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May 31st, 2012

North Dakota ?? Shale Oil Surge

by Andrew Price, President & COO

North Dakota recently passed Alaska and California to become the 2nd highest oil producing state in the United States. North Dakota production has surged from 100,000 barrels per day in March 2005 to almost 600,000 barrels per day in March 2012. North Dakota is still far behind Texas which produces over 1 million barrels per day, but the explosive growth is adding to the strain on transportation options available to move the crude oil to US refineries.

Oil Shale

The surge in crude production is due to improvements in horizontal drilling and hydraulic fracturing  techniques, the same technologies used to create the boom in US natural gas production. The Bakken shale formation, which underlies northwestern North Dakota, as well as parts of Montana and Canada, is turning into an enormously productive oil reservoir. The Bakken shale formation is located near the Canadian tar sands which was already straining crude oil pipeline capacity into the US. In a previous blog (Canadian Tar Sands Oil Flowing South I suggested that stemming the flow of Canadian tar sands oil may be a Sisyphean task.

The controversial Keystone XL pipeline that was designed to move tar sands oil from Canada to refineries along the Gulf Coast has been delayed while the stakeholders discuss a new route that is less likely to disturb sensitive and high value ecosystems. Several other pipelines quickly stepped into the void and are expanding capacity on existing lines, which will not need the same level of regulatory approval as Keystone XL.

Railroads are also joining the oil rush. As Tux Turkel reported in the Portland Press Herald on May 30th, a unit train loaded with 104 tank cars of Bakken shale oil recently made the 2,500 mile trek from North Dakota through Chicago and Portland Maine on its way to the Irving Oil refinery in Saint John New Brunswick. Each tank car holds about 700 barrels of oil. While significant, the unit train still represents only about 30% the daily capacity at the Irving refinery, which can process about 250,000 barrels of crude oil a day. The Irving refinery produces close to 50% of the petroleum products imported into New England and is reportedly expanding its rail unloading capability from only 2 tank cars per day to 100 tank cars per day.  Irving currently gets most of its crude delivered by ship from overseas – but the price for this crude is linked to the London traded Brent benchmark, which has been trading at a $15 to $20 per barrel premium to the US crude oil NYMEX benchmark priced at Cushing Oklahoma.

Expanded rail and pipeline infrastructure is likely to eventually narrow the gap between Brent and NYMEX crude pricing by relieving congestion at the Cushing storage hub. In the near term, however, it is not clear that new rail and pipeline improvements will keep up with the pace of rapidly expanding crude oil production. Some analysts project the North Dakota production could increase to 1 million barrels per day by 2015. If this is the case, we may continue to see depressed NYMEX crude pricing relative to Brent in the near term.

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