Pipeline & Rail Competition for Crude Transportation in North Dakota

Presentation For: Natural Gas Energy Association

Of Oklahoma January 9, 2014

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Agenda

» Crude Production Takes Off

» Pipeline Constraints

» Rail Developments

» Competition between Rail and Pipeline

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Conclusions

» Increased Crude Production Overwhelms Existing Distribution System

» Delays Cause Crude Delivery Logjam and Price Disruption

» Rail Terminals Develop to Bypass the Logjam

» North Dakota now has adequate takeaway capacity

» Rail and Pipeline Compete Based On Crude Differentials

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U.S. Crude Oil Production

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Mb

/d

Lower 48 States Alaska

1.5 million b/d Increase from 2008

Source: BENTEK and EIA

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Canadian Oil Production

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5M

Mb

/d

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5.0

5.5

6.0

6.5

7.0

7.5

MM

B/d

U.S. Crude Oil Production

2.0

2.4

2.8

3.2

3.6

4.0

MM

B/d

Canada Crude Oil Production

U.S. & Canada Crude Oil Production

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Permian, Williston, Eagle Ford

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Oil

(mill

ion

b/d

)

Permian

Williston

Eagle Ford

Source: BENTEK and HPDI

» The Eagle Ford, Williston and Permian have been responsible for almost all of the U.S. production growth since 2010

» These are the plays with the highest rates of return for producers

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U.S. Oil Production 10 MMb/d in 2018

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

‘00

0s

b/d

2000-2007 2008-2011 2012-2018

3,500

Source: Bentek/RBN

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Bakken Production North Dakota

0

200

400

600

800

1,000

Jan-07 Jan-09 Jan-11 Jan-13

Mb

/d

North Dakota Crude Production » North Dakota crude

production increased 275% in the 3 years to Oct 13

» Rate of increase slowing but still up 25 % in the past year

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Forecast Increase in ND Production

» Base case production increase to 1.4 MMb/d by 2022

» High Case increase to 1.6 MMb/d

0.6 MMb/d

Increase

Source: North Dakota Pipeline Authority

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Pipeline Takeaway Capacity

0

200

400

600

800

1,000

1,200

1,400

Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13

Mb

/d

North Dakota Crude Production and Takeaway Capacity

Oil Production

Pipeline Cap.

» Pipeline capacity has not accommodated production since 2011

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Bakken Pipeline Takeaway

» Pipeline takeaway capacity 515 Mb/d

» Mandan Refinery 68 Mb/d » Total 583 Mb/d » Production 941 Mb/d » Additional constraints

developed downstream

Tru

e 1

60

Mb

/d

Source: BENTEK

Tesoro Mandan

Refinery 68 Mb/d

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North America Crude Oil Flows

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System Overload!

Source: Muse, Stancil & Co.

Bakken

Eagle Ford

Canada

Niobrara

Permian

East Coast No

Pipeline Access

West Coast No

Pipeline Access

Gulf Coast

Waiting for

Pipeline Build out

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Differentials to WTI Cushing - 2012

New Mexico

Permian Basin

Texas

Houston

Midland

Cushing, OK

St James, Louisiana

LLS + $18.0

WTI $0.0

WTI - $4.0

Brent + $18.0

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Rail Transport Development

» Bakken crude prices discounted by pipeline congestion

» Coastal prices higher

» Rail development cycle is short

» Build out of rail loading in 2012

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North Dakota Rail Build Out

Unit Trains • 100+ tank cars • 66,000+ barrels

per train • Same origin and

destination • Usually same

commodity and shipper

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North Dakota Rail Terminals 2014

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North Dakota Takeaway Capacity

0

200

400

600

800

1,000

1,200

1,400

Jan-07 Jan-09 Jan-11 Jan-13

Mb

/d

North Dakota Crude Production and Takeaway Capacity

OilProduction

RailCapacity

PipelineCap.

» Rail capacity more than makes up for pipeline gap

» Rail provides shippers with better netbacks

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Bakken Netback Analysis

» Producers/shippers will choose markets that maximize netbacks

» Netbacks are a function of (a) transportation costs, and (b) the differentials between destination crude prices

» Brent (East Coast), LLS (Gulf Coast), WTI (Midwest), ANS (West Coast)

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Bakken Netbacks – 1/7/13

8

84 C/P

80 C/R

12 17

94 E/R

+1

,,

95 NW/R

NW by Rail 109 NW

99 G/P

11 G

ulf b

y Pip

e

15

95 G/R

Gu

lf by R

ail

-18

92 Cush

110 Gulf

111 East

-1

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Bakken Netbacks – 10/24/13

8

88 C/P

84 C/R

12 17

91 E/R

+10

,,

88 NW/R

NW by Rail 102 NW

87 G/P

11 G

ulf b

y Pip

e

15

83 G/R

Gu

lf by R

ail

-2

96 Cush

98 Gulf

108 East

+4

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Bakken Netbacks Summary

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Bakken Production And Rail Volumes

0

100

200

300

400

500

600

700

800

900

1000

Mb

/d

Estimated Williston Basin Rail Export Volumes

CrudeProduction

EstimatedND RailExportVolumes

Source: NDPA (North Dakota Pipeline Authority)

Rail volumes fall off in Q3 2013 due to lower differentials

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Price/Netback Outlook

NW by Rail NW Mid

Gu

lf by P

ipe

Gu

lf by R

ail

Cushing Weak

Gulf Very Weak

East Strong

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Conclusions

» Increased Crude Production Overwhelms Existing Distribution System

» Delays Cause Crude Delivery Logjam and Price Disruption

» Rail Terminals Develop to Bypass the Logjam

» North Dakota now has adequate takeaway capacity

» Rail and Pipeline Compete Based On Crude Differentials

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Sandy Fielden 3333 Allen Parkway, Suite 1807

Houston, TX, 77019

sfielden@rbnenergy.com @thatenergyguy

http://www.rbnenergy.com/daily-energy-post