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Refinery at sunset. Image courtesy Philadelphia Energy Solutions.

From the East Coast, Bakken Oil’s outlook not so bad

PHILADELPHIA, Pennsylvania – Doom and gloom over production declines, and a rapid decline in oil-field jobs has many people worried in North Dakota, but the outlook sketched in by analysts and energy leaders in Denver, Colorado, at the recent DUG Bakken/Niobrara Conference sponsored by Houston-based Hart Energy, presented a different picture.

“Keep Calm and Drill On,” the slogan emblazoned on the tote bags distributed at the Colorado Convention Center advised attendees, and that message seemed to resound in the conference sessions. A recent announcement that Conoco Phillips plans to raise its Bakken rig count from five to 10 in 2017 seemed to echo the sentiment.

And looking at it from the East Coast, home to six oil refineries handling about 1 million barrels a day of mostly Bakken crude in the Delaware Valley — more than 1.2 million Bbl/d if Phillips 66’s Bayway facility in Linden, New Jersey’s New York Harbor plant’s uptake is counted —  that message clearly makes sense.

Heavy appetites

Philadelphia Energy Solutions, operator of the East Coast’s biggest refinery at its 357,000-Bbl/d capacity, runs two high-speed rail unloaders every day, moving Bakken crude from two 100-car CSX “unit” trains each, some 70 percent of its refining capacity. And according to materials distributed at Philadelphia Energy’s downtown headquarters, two other rail unloaders are in the works. One is to unload butane, likely from the rich-gas fields of Southwest Pennsylvania and West Virginia and plays as far away as Texas, but the other one is for crude oil.

Just down the Delaware River shore at Eddystone, Pennsylvania, another unloader takes crude from two Norfolk Southern unit trains and loads it onto a barge for transport to Delta Airlines’ subsidiary Monroe Energy, to be refined into jet fuel, kerosene and diesel in its 205,000-Bbl/d plant, with any gasoline produced sold off to a retail partner.

At Delaware City, south of Wilmington, Delaware, PBF Energy’s 190,000-Bbl/d refinery operates another rail unloader. Its capacity is much less than Philadelphia Energy’s, but company press releases say its uptake is being increased. And what does get unloaded is shared, barged across the Delaware to Paulsboro, to PBF’s 180,000-Bbl/d New Jersey refinery.

Price cuts cause pain, but…

The background in North Dakota’s production fields does not look encouraging, to be sure. A projected loss of 3,000 to 4,000 jobs forecast in late March by North Dakota’s Lynn Helms probably amplified the gloom as the drilling rig count fell to 111, and Helms, director of  the state Department of Mineral Resources, said it could get worse. That number, down from 193 rigs a year ago, would not be enough to sustain production growth, he said.

Then the drilling-rig count fell to 98, a level state officials said would be too low to sustain the existing production level of 1.2 million barrels a day.

Well, maybe. The increasing appetite of Delaware Valley refiners for Bakken crude is unabated. Figures from the U.S. Energy Information Administration say some 70 percent of North Dakota’s crude makes its way to the Philadelphia area, displacing the African crudes traditionally brought up the river by ship. With the expansion of Philadelphia Energy’s and PBF Energy’s rail unloading capacities, that’s likely to change.

Forecast for ‘a diamond in the rough’

At DUG Bakken, Trisha Curtis, director of upstream and midstream research for the Energy Policy Research Foundation, Inc., expressed cautious optimism. Calling the Bakken “a diamond in the rough,” Curtis indicated that the producers might find a way forward by pushing for better efficiencies in well-completion and using “best practices” in well selection.

Explaining that producers in the Bakken, “the best-known shale and tight-oil formation in the world,” had to live with the “tempered expectations” of growth in the Chinese and European markets, Curtis laid out the factors behind the recent oil price declines:

  • Bountiful exploitation of shale and “tight oil” formations has pushed U.S. production to 9 million barrels a day;
  • In turn, those producers have seen “significant” quantities of Bakken and Gulf Coast crude move to Canada, displacing Middle East and North African crudes, lowering prices, while at the same time
  • Large amounts of Libyan crude suddenly came on the market;
  • Thus, while North Dakota’s output reached more than 1 million Bbl/d, experiencing only slight declines,
  • Producers in Texas’ Permian Basin have taken the biggest hit in rig-count losses and production.

Her cry: Cut, cut, cut cost

Curtis forecast that low oil prices will continue in the short term, but she indicated that producers still may prosper if completion costs, which she said were 60 percent of well costs, can be brought down. Re-fracking existing wells can work, she said, but not many companies have done it. Where it is most likely to work, she said, is in wells that once were strong producers: “What was good before will be good again,” while those that did not produce strongly would likely not benefit from a re-fracking.

The upshot, from Curtis and other speakers at DUG Bakken, is that for producers strong enough to stay the course, increases in production efficiency will keep them profitable.

Turning to the question of wells drilled but not completed, Curtis cautioned that oil-field job losses would definitely affect producers’ ability to rapidly bring those wells to production, but she also acknowledged that most of the crude shipped out to the East and West Coasts by rail from the Bakken heads east.

The reason, Curtis said, is that Bakken crude is a “natural fit” for East Coast refineries. It provides a “very nice distillate share,” which probably matters a lot to Philadelphia Energy, a major exporter of diesel, and to Monroe Energy, busy producing jet fuel for Delta Airlines.

And it probably does not trouble those East Coast refiners that crude oil prices are down. Analysts at DUG Bakken and elsewhere say that at the consumers’ end of things, low prices serve to bring on more consumption, working to dry up the excess at the bottom of the price drop.

 

Garland L. Thompson covers technology and energy issues for US Black Engineer & Information Technology magazine and its siblings, Hispanic Engineer & Information Technology, published by Baltimore-based Career Communications Group.

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