The Bakken Oilfield: Pipelines Considering Crude By Rail Opportunities

Includes: BRK.A, BRK.B, CP, EEP, EOG, HES
by: Matt King

Enbridge (NYSE:EEP) announced today their plans to increase pipeline capacity for Bakken crude into Berthold, ND by 80,000 barrels per day. What's interesting is that those additional 80,000 barrels per day do not have an outlet via pipeline. This 80,000 barrel inbound capacity will have to be matched by an outbound transportation mode: in this case, the railroad. The BNSF (NYSE:BRK.A)(NYSE:BRK.B) Railway serves Berthold, ND and surrounding areas directly. The Canadian Pacific Railway (NYSE:CP) has its mainline and affiliate line (DMVW) in close proximity as well. Although there is competition, BNSF will be the choice for Enbridge because they are the pro at moving crude by rail.

As we have discussed before, crude by rail is not a new concept. Crude by rail has been going on since the time of Rockefeller. However, it has never been done on a scale of this magnitude. EOG Resources (NYSE:EOG) was the pioneer in shipping unit trains of crude out of the Bakken, and many others are quickly following suit. While producers such as Hess (NYSE:HES) and others are building their own private terminals, there are a few terminals coming online that will offer the capability to ship by rail to third parties.

The pipeline companies initially baulked at large-scale rail takeaway solutions and stated that pipelines were the only true long-term solution. But, with the uncertainty surrounding large scale international pipelines, due to the current regulatory environment, many pipeline companies and pipeline associates have jumped on board.

Rangeland Energy, a member of the EnCap Investments group, is built mostly of management from the pipeline world. In addition to supplying a crude by rail solution, their intent is to build pipeline gathering systems to route crude directly to the rail loading sites thereby reducing handling and short-haul transportation costs.

Bakkenlink Pipeline LLC initially set out to provide a connection to the Keystone XL pipeline for an on-ramp for Bakken crude. After the continued delays, Bakkenlink intends to build a crude unit train loading facility on the south end of the Bakken field as well as build a gathering system to connect directly to well sites.

Eighty-Eight Oil, a subsidiary of the True Companies, recently announced an agreement to ship crude by rail out of the Lario Logistics facility near Dickinson, ND, dubbed the "Bakken Oil Express." Under the True Companies umbrella exists the Bridger Pipeline group which also sought to provide an on-ramp for Bakken crude to the Keystone XL.

The pipeline companies, while late to "rail game" in the Bakken, will bring the best value for smaller crude shippers who cannot commit to building a full scale unit train loading facility. Pipelines generally operate on a take-or-pay type structure, so you can bet these facilities have excellent economics for the owners, despite the higher cost of shipping crude by rail.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.