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Dale Wetzel, Associated Press Writer, Published September 06 2010

Pipeline space shortage hits North Dakota oil revenues

BISMARCK – Transportation bottlenecks reduced the prices that North Dakota oil producers got for their crude for most of last year, which cost the state treasury about $17.1 million in tax collections, a state regulator says.

The price discounts also meant the state Land Department, which sells the rights to explore for oil and gas on state-owned land, collected about $17.4 million less in royalties, said Lynn Helms, director of the state Department of Mineral Resources. Both figures were calculated during the state’s last budget year, which began July 1, 2009, and ended June 30.

During most of last year, North Dakota oil producers pumped more crude than could be shipped by the state’s existing pipeline network, industry officials say.

Other transport options, including trucking and rail shipping, are more expensive. That depresses the price that oil producers get for their crude because it costs more to ship their product to market. In turn, that means smaller oil tax collections and royalty payments.

“It begins to raise some flags,” Helms said of the lower prices for oil producers. “I don’t know that it’s alarming, but it begins to be a concern. It points to an ongoing problem that we’re having.”

North Dakota’s remoteness from markets increases shipping costs, and Helms said it is considered normal for the state’s producers to get prices that are 10 percent less than the price for West Texas Intermediate crude oil, which is considered a market benchmark.

However, during 10 of the 12 months of the state’s last budget year, those discounts have been greater than 10 percent, Department of Mineral Resources data shows. In May, they were about $4.15 a barrel greater than the normal 10 percent discount, the data say. In June, it was $3.09, during a month when western North Dakota produced 9.3 million barrels of oil, the highest volume during the 12 months.

North Dakota has only one oil refinery, a Tesoro Corp. facility near Mandan, which is capable of processing about 58,000 barrels of oil daily, less than one-fifth of the state’s daily production of 315,000 barrels. North Dakota ranks fourth among states in oil production, behind Texas, Alaska and California.

Pipeline shipping capacity is about 337,000 barrels a day, but oil production from eastern Montana also competes for the space, said Justin Kringstad, director of the state Pipeline Au­thor­ity. About 60,000 barrels can be shipped by train, which is costlier than using a pipeline.

Analysts forecast that North Dakota will be producing about 450,000 barrels of oil daily in two years, with between 80,000 and 100,000 barrels from eastern Montana, Kring­stad said.

“We’re going to have these growing pains,” he said. “It takes some time for the transportation to catch up when you have in­creased oil production.”

Enbridge Inc., which now ships about 161,000 barrels of crude daily from the Bakken and Three Forks shale formations in western North Dakota, recently announced a $550 million project to add about 145,000 barrels daily to that capacity. The company expects to finish the project by March 2013.

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