HOUSTON Oct 8 North Dakota oil producers were
dealt another blow this week when Royal Dutch Shell
said it would scrap plans to build an oil train terminal in
Washington state that would have taken over 400,000 barrels per
week of Bakken and other inland crudes.
Shell's move on Thursday comes at a bad time for Bakken
producers, who have endured a two-year price rout and need new
routes to move their oil to coastal refineries.
Inland North American producers have seen four projects
stymied since September, owing to both environmental opposition
and an oversupplied global oil market that make it easier and
cheaper to import cargoes than transport inland crude thousands
of miles on railcars.
On Wednesday, San Luis Obispo, California, city planners
rejected a rail terminal proposed by Phillips 66, two
weeks after the city council of Benicia rejected Valero Energy's
proposed 70,000 barrel per day (bpd) facility.
Not long before that, protests by Native Americans worried
about environmental impact prompted the U.S. government to halt
work on the 470,000 bpd Dakota Access Pipeline (DAPL), which
would take North Dakota oil to the Midwest and Gulf Coast.
The potential loss of takeaway capacity on DAPL and a drop
in West Coast demand could spell more pain for producers in the
Bakken, where output has fallen by more than 15 percent on the
prolonged rout in oil prices.
"This development (with Shell), along with the developments
regarding the DAPL, will hurt Bakken producers' netbacks," Sarp
Ozkan, a senior energy market analyst with Denver-based
Ponderosa Advisors, said in reference to profits.
Shell said the conditions of the global crude market and a
tight capital environment made its project uneconomic.
Shell's rail facility would have connected to an existing
rail line and supplied Shell's 145,000 bpd Anacortes refinery
with light crude from North Dakota.
Phillips 66 this week said it is considering appealing the
City Planning Commission's decision.
Current pipeline and refining capacity out of the Bakken is
around 851,000 bpd, and about 60 percent of its output leaves
the region on pipeline, according to the state's pipeline
Nearly all of the rest goes by rail, which has loading
capacity around 1.52 million bpd.
Despite the latest setbacks, Jonathan Garrett, a principal
analyst at consultancy Wood Mackenzie, said low prices are still
a bigger concern for North Dakota producers than transportation.
"The biggest challenge to the Williston Basin right now
isn't transportation, it's oil prices. Takeaway capacity is a
concern but that's not going to be the thing that makes the
Williston Basin a difficult place to operate," he said.
Benchmark U.S. oil prices have jumped by more than $6 per
barrel in the last week following news that the Organization of
the Petroleum Exporting Countries (OPEC) has reached an
agreement to curb supply, with West Texas Intermediate (WTI)
futures settling above $50 per barrel on Thursday.
Higher oil prices could unleash a wave of supply from the
Bakken, which as of June had more than 700
drilled-but-uncompleted wells, more than any other major shale
region in the United States, according to data from Wood
Bakken discounts to WTI have narrowed sharply since 2013,
and in early October were at about $1 WTC-BAK.
That is good for Bakken producers, but makes paying for
costly rail too expensive for West Coast refiners.
Railed volumes entering the West Coast from the Midwest fell
to around 106,000 barrels per day this summer, off 43 percent
from a peak in November 2015, according to the U.S. Energy
(Reporting by Liz Hampton; Editing by Terry Wade and Cynthia