The Rising Influence of Rising Affluence

[DewDiligence]

Riding the Dakota Oil Boom

[How oil from the Bakken gets where it needs to go.]

http://online.wsj.com/article/SB10001424052970203707504577010463934234498.html

›NOVEMBER 2, 2011
By MARK PETERS And BEN LEFEBVRE

DICKINSON, N.D.—A surge in crude-oil production in North Dakota is fueling a railroad boom in one of the nation's most remote regions, as producers bet that trains will be a quick and lucrative way to break a transportation bottleneck.

The steady conveyor belt of jet-black rail cars is just the latest change in this state's western corner. Already clusters of trailers, known as man camps, have popped up in pasture lands outside of small towns like Watford City, N.D., to house oil workers. Watford City has gone from a quiet crossroads without a single stoplight to a bustling hub with its own rush hour, because it serves as a stopping point for truckers looking for diesel, Red Bull and Hot Pockets.

"We don't have the quiet, tranquil county we had, but a lot of people are working," said Ron Rankin, sheriff of McKenzie County, where Watford City is located.

The trains, trucks and trailers point to what has become a central challenge facing North Dakota's rise as a U.S oil-producing power: how to get crude out of the massive Bakken Shale reserve and to the refineries far away that process it.

North Dakota's output has grown in the last three years from a trickle to nearly 450,000 barrels a day—trailing only Texas, Alaska and California—and could double by the middle of the decade, according to analyst and industry projections. But pipelines in the region already are operating at capacity, and major new lines aren't expected to start going into service until 2013.

In response, companies are building rail terminals. Rail terminals can be developed quickly, giving them an advantage for now over pipelines. The North Dakota Pipeline Authority estimates a doubling in rail-terminal capacity next year alone to more than 700,000 barrels a day.

Most of the oil gets to the train depots by truck, picked up from thousands of wells scattered off dirt roads. At night, natural gas being flared from the oil wells casts an eerie glow over the vast prairie lands.

North Dakota boasts the nation's lowest unemployment rate, at 3.5%, as companies scramble to attract truck drivers and construction workers to keep pace with the crude. On a recent morning, the sound of a rivet gun mixed with the hum of truck engines in Dickinson, a key jumping-off point just south of the oil fields. Workers laid railroad tracks and truckers filled oil tanks, rushing to open the Bakken Oil Express Rail Hub, a new rail terminal nestled among wheat fields.

In the past, cost concerns have caused producers to prefer pipeline transportation over rail. Oil traders estimate that transporting crude by rail can cost on average $5 to $10 a barrel more than by pipeline, but several factors—including the size of a load and its final destination—can swing the costs.

The light, sweet crude flowing from the Bakken, which refiners like for its quality, is inexpensive enough to eliminate those concerns, thanks in part to a boom in inland crude production that drove the U.S. benchmark oil price to nearly $30 a barrel below that of the European benchmark price, known as Brent crude [#msg-zzz].

The differential creates a huge incentive for refiners to buy low-priced Bakken crude and move it by rail to their facilities in the Midwest and Southeast and on the East and West coasts. Refiners process the crude and fetch the same price for gasoline as their competitors who are using the more costly imported Brent.

There are risks to betting on rail: capacity could expand too rapidly, or the oil-price differential that now helps to make rail competitive could collapse. But many of the privately held companies that are largely developing the railroad terminals believe that the strong demand for rail transportation now will translate into a permanent need even as pipelines come into service.

"The need for the service is right now. It is kind of a game of being first to market," said JP Fjeld-Hansen, managing director of Musket Corp., which is expanding its terminal in Dore, N.D., near the Montana border.

The Bakken is far less concentrated than traditional oil production in the continental U.S., which means countless truck trips: More than 70% of the oil in North Dakota is moved from well to rail terminal or pipeline by tractor trailers. For drivers, the money is good, but they must endure harsh winter weather, homesickness and the constant jostle of dirt roads, said Tim Pust, a driver supervisor for Lunderby Trucking in Sidney, Mont., which has grown from one truck to 18 trucks over the past year.

Finding enough truckers is a challenge. One of the few ways to attract drivers is to provide housing, Mr. Pust said.

Producers and rail operators also report shortages in tank cars, particularly as oil production booms in other parts of the U.S. Rail-car provider Union Tank Car Co. said it has no more crude-ready cars available and a sizeable backlog of orders. Lease prices for tank rail cars have nearly doubled in the past 18 months, reaching about $1,000 a month per car, said Larry Padfield, vice president at U.S. Development Group.

The firm operates a crude terminal in the Eagle Ford region of Texas, which also is undergoing an oil-and-gas boom. Producers are looking to develop oil shale formations in Ohio and Colorado as well.

Still, some in the industry are starting to worry about a possible bubble as rail transportation grows and orders for rail cars keep mounting. Rail-car maker GATX Corp. recently warned growth in the Bakken is starting to look overheated.

Bakken demand "will grow, but we're going to grow it very carefully ... [it] is starting to feel a little speculative in nature," said Robert Lyons, GATX's chief financial officer.‹