ND crude shipping capacity catches up with production, drives down discounts

ND crude shipping capacity catches production

BISMARCK, N.D. — Millions of dollars in infrastructure improvements have allowed North Dakota’s crude shipping capacity to catch up with production for the first time in more than a year — bumping up the value of a barrel of oil for producers and sending more money to state coffers.

But officials say the so-called takeaway capacity may be short-lived because an end to the boom in the state’s oil patch is nowhere in sight.

Full exploitation of the Bakken shale formation in western North Dakota has been hamstrung by the lack of pipelines and rail facilities to move the crude to market. The state reached its pipeline, rail and refining capacity of about 189,000 barrels a day in October 2008, slowing rig activity and forcing producers to take steep discounts.

“When we hit capacity, we were struggling to find alternative options,” said Justin Kringstad, director of the North Dakota Pipeline Authority.

Since then, infrastructure work including new rail shipping facilities and pipeline expansions has increased North Dakota’s shipping capacity to about 400,000 barrels a day, he said.

The state has increased its pipeline capacity already this year by about 110,000 barrels a day, with a new rail facility and pipeline expansions. Those improvements alone helped bump the price of North Dakota sweet crude by a few dollars per barrel, officials say.

North Dakota set a production record of more than 261,000 barrels a day in February, the latest figures available, said Lynn Helms, director of the state Department of Mineral Resources.

The state produced about 79.7 million barrels of oil in 2009, up from a record 62.8 million barrels the year before.

For a time after the state reached its takeaway capacity in 2008, North Dakota sweet crude fetched up to 28 percent less than daily oil prices on the New York Mercantile Exchange because of the difficulty in getting it to market, Helms said.

“The price differential is well under 10 percent now,” Helms said. “Transportation really got us in a bind. It’s nice to see that differential go way down there.”

State Tax Department analyst Kathy Strombeck said at current production levels, every $1 increase or decrease in the price of oil impacts gross state tax revenue by $9.3 million a year.

Helms said if crude prices hold, North Dakota could hit 350,000 barrels of oil a day by late 2011. That amount of production is within the state’s shipping capacity.

“We’re caught up but we’re going to have to keep hustling,” Helms said. “Our best guess is we should be in good shape for about two years.”

“I hope he’s right,” said Ron Ness, president of the North Dakota Petroleum Council, which represents energy companies. “Markets are waking up to the value of this Bakken crude. It’s getting into markets and displacing foreign crude.”

One new market is in Louisiana, where North Dakota crude was shipped by rail for the first time this month. San Antonio-base NuStar Energy LP has shipped about 15,000 barrels of oil on three trains this month to a terminal in St. James, La., said John Greehey, a company vice president.

The company plans to ship up 10,000 barrels of Bakken crude daily by the end of the year, he said.

North Dakota surpassed Louisiana last year as the fourth-largest oil-producing U.S. state. Greehey said part of the reason his company is targeting North Dakota crude is because of declining production from Louisiana and the uncertainty of foreign sources.