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Mike Nowatzki, Forum News Service, Published December 12 2013

Top regulator says 90 percent of ND oil could move by rail next year

BISMARCK – North Dakota’s top oil regulator said railcars could move up to 90 percent of the oil produced in the state next year as differences in crude prices make rail more lucrative for operators than shipping by pipeline.

“We’re expecting 2014 to be soft in the crude price scenario, and so railcars are going to be absolutely vital to what we do in North Dakota,” Lynn Helms, director of the state Department of Mineral Resources, said Thursday.

North Dakota is the nation’s No. 2 oil-producing state behind Texas, with total daily output projected to top 1 million barrels by early next year.

Railcars carried about 63 percent of the state’s oil production in September, the most recent month for which figures were available, said Justin Kringstad, director of the North Dakota Pipeline Authority.

Meanwhile, the price for a barrel of Bakken sweet light crude fell from about $96 in July to $73.50 this month, Helms said. At that price, it’s still “extremely economical” to drill in North Dakota’s four core oil-producing counties – Dunn, Mountrail, McKenzie and Williams – as well as in Stark and Divide counties, but not in Oil Patch fringe counties, he told the Legislature’s interim Government Finance Committee.

North Dakota ‘s oil industry has seen an “enormous shift” from pipeline to railcar in the last three to four months as the gap has widened between the world oil price and the U.S. benchmark price and between the U.S. price and the Bakken sweet crude price, Helms said.

Shipping by railcar to specific markets is netting operators $24 per barrel more than moving it by pipeline, which is helping the state meet its revenue forecast from oil taxes, Helms said. He said one operator that was transporting 75 percent of its oil by pipeline to Minnesota and Wyoming in July is now moving 95 percent by railcar to refineries in Philadelphia and St. James Parish, La.

“So rail has really saved our bacon in this whole business,” he said.

As for the state’s total oil production, Helms said the percentage moved by rail probably won’t reach as high as 90 percent, “but it could if we see continued increases in those price differentials.”

Kringstad said he doesn’t have a projection for 2014, but he added, “I expect, given the market conditions today, that going forward we’ll see additional barrels being moved by railcar.”

Side effects

Increased rail traffic isn’t without its concerns.

Last weekend, Amtrak canceled half of its passenger trips on the Empire Builder route that runs from Chicago to Seattle and Portland, Ore., blaming heavy freight train traffic in the oil fields and an early winter cold snap. One lawmaker said Thursday he’s heard rumblings from local grain merchants about oil-related rail traffic affecting the quality of service.

Helms said some also are trying to raise fears about moving Bakken crude by rail, after a train carrying it derailed and exploded in the Canadian province of Quebec in July, killing 47 people. He said there’s a plan to develop a white paper through the Pipeline Authority that will analyze Bakken crude and try “to dispel this myth that it is somehow an explosive really dangerous thing to have traveling up and down your rail lines.”

Long-term outlook

Helms also gave lawmakers a long-term outlook on the state’s oil play.

At the end of October, the western part of the state had 6,447 wells in the oil-rich Bakken and Three Forks formations. Fully developing the formations will require drilling another 60,000 wells over the next 20 years, Helms said.

“We’re at about mile 50 in the Daytona 500,” he said.

The state has granted 1,552 drilling permits for 2014, with 736 permits pending approval, and has approved 1,012 orders for 5,247 more wells to be drilled from 2015 to 2019, Helms said.

“We have roughly five years’ worth of drilling already coming down the tracks,” he said.

The Oil Patch’s footprint isn’t expected to grow much, but well pads that now contain only one oil well will someday have up to 10, Helms said. Still, overall oil production is expected to level off within the next few years and begin to drop gradually as the high output from new wells falls off and the Bakken and Three Forks move into a more mature production phase.

“That’s going to have some pretty major ramifications for the state budget, too,” said Rep. Jeff Delzer, R-Underwood, the committee’s chairman.

Helms agreed, saying it’s “becoming harder and harder to push that total production number up because of those steeply declining wells like that.”

North Dakota is forecast to collect $5.28 billion in oil taxes during the 2013-2015 biennium. Collections from the state’s oil and gas production tax and oil extraction tax totaled nearly $1.07 billion from August to November, nearly $226 million more than forecasted and $614 million more than during the same period in 2011, according to a Legislative Council report Thursday.