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Delta, Carlyle to Source Railed Bakken Crude


Bypassing both Brent and WTI, Delta and other new owners of East Coast refineries may opt to use Bakken.


While the utilization of Bakken crude in the Trainer refinery certainly makes sense for now, there still lies the uncertainty of accurate estimates of recoverable oil within the North Dakotan shale formation. According to the state's Department of Mineral Resources, during June 2012, approximately 594,000 bbls/d were produced from the source rock, 85% greater than during the previous June. At the same time, the rate of production per well now stands at 144 barrels/day (bpd).

This figure has remained relatively steady since January, trending in a range of 139 to 144 bpd, in comparison to the 18 bbls/d level seen as recently as 2006. The stabilizing rate may imply that increasing production in the future will require significantly more investment than before-each additional barrel will be more expensive to remove from the ground than the one preceding it. In any case, diversifying Trainer's input mix between Bakken and European crudes will most probably facilitate an overall de-risking of its cost profile.

The Bakken shale revolution has not only had the direct effect of reducing unemployment as workers flock to North Dakota to satisfy companies' hunger for any and all types of labor, but also reverberations that extend to an impending boom within the generally quiet railroad industry.

On August 2, Tesoro (TSO) CEO Greg Goff announced that the company will increase capacity for a rail unloading facility at its Anacortes, WA refinery in order to reduce reliance on more expensive Alaska North Slope ("ANS") crude. Burlington Northern Santa Fe, a subsidiary of Berkshire Hathaway Inc. (BRK-A), announced last Tuesday that it has seen growth of Bakken crude shipments "from 1.3 million barrels in 2008 to 88.9 million in 2012," an almost 70-fold increase in only five years that demonstrates how rapidly railroad companies must boost capacity in order to attempt to keep up with oil production in the basin.

Despite the numerous criticisms and befuddled reactions Delta received while purchasing the Trainer refinery only a few months ago, perhaps its foresight will bring cost savings in excess of those originally predicted.

Still, the question remains, will we see more vertically integrating refinery purchases similar to Delta's as facilities that are perfectly placed to take advantage of both "rail-able" Bakken crude and nearby Marcellus shale natural gas provide significant potential for cost savings? Only time will tell, but the trend as of late suggests that whatever the answer (and whoever is elected President in November), the American energy renaissance is here to stay and thrive.

(See also: Why Are Private Equity Firms Buying Up Refineries on the East Coast?)
No positions in stocks mentioned.

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