Enbridge Energy Partners LP’s North Dakota crude oil pipeline system has been underutilized since November due to increasing competition from rail and other pipeline transport options, refiner Flint Hills Resources LP, a unit of Koch Industries Inc., told FERC in a filing.
Enbridge is seeking a surcharge on customers to cover the $1.5 billion cost of expansion capacity from Beaver Lodge, ND, to Clearbrook, MN, and has said in support of the request that demand on its system exceeds capacity, Flint Hills said in its filing [OR13-6]. Flint Hills protested, saying the proposed Sandpiper Project would be underutilized due to “numerous transportation alternatives” planned or near completion.
Separately in its own filing, EnWest Marketing LLC said, “…Enbridge North Dakota telephoned shippers this month [November] offering them additional throughput capacity for November 2012. I [Robert Garner, EnWest Marketing managing partner] am also aware of the fact that other North Dakota crude oil pipelines have not been running at capacity in recent months.”
EnWest also said Enbridge North Dakota was expected to offer an additional 200,000 b/d of capacity on its North Dakota system in February. “This additional capacity will consist of 120,000 b/d of capacity from new pipe between Berthold, ND, and Cromer, Manitoba, and 80,000 b/d from rail transport situated at Berthold.”
Enbridge claimed that underutilization of its North Dakota system last November was “due to temporary negative market price differentials for Bakken crude ‘that will no longer exist by the time Sandpiper goes into service, given that there are a number of pipeline projects currently under way in North America which are expected to address the transportation bottlenecks which have led to these price differentials,'” Flint Hills told the Federal Energy Regulatory Commission.
However, Flint Hills asserted that “the trend is not temporary” and that underutilization of the Enbridge system “is attributable to increased amounts of competing rail and pipeline transportation alternatives.
“…In particular, rail transportation is becoming more competitive and will continue to take barrels away from the Enbridge North Dakota system. The removal of the price differentials that Enbridge North Dakota predicts will happen before the projected in-service date of the Sandpiper project will not change the competitiveness of rail options, particularly in light of the increase [in] rates projected by Enbridge North Dakota resulting from the roll-in of the $1.5 billion costs of the Sandpiper Project.”
Enbridge’s Bakken Expansion Program is expected to add 200,000 b/d of export pipeline capacity from the Bakken Shale — 80,000 b/d into Berthold and 120,000 b/d into Cromer, Manitoba — taking Enbridge’s total capacity from North Dakota to 475,000 b/d some time early this year.
In response to the Flint Hills allegations, Enbridge spokesman Graham White said, “We are seeing reduced volumes on our North Dakota system as some producers seek alternate transportation options to take advantage of favorable oil pricing in other markets. Volumes on our North Dakota System will significantly increase as our regional market access projects begin to come on line later this year.”
It costs more to ship oil by rail than pipeline; however, the burgeoning Bakken has lacked adequate pipeline infrastructure from the oil patch to markets, so producers have been turning to rail solutions (see Shale Daily, Nov. 2, 2012), some of which have been provided by Enbridge.
“Rail is the fastest way to provide increased export capacity out of the Bakken, creating a near-term solution to transportation bottlenecks and the resulting crude oil pricing differentials,” Stephen J. Wuori, president of Enbridge’s liquids pipelines business, said in late November when discussing the company’s joint venture with Canopy Prospecting Inc., the Eddystone Rail Co. (see Shale Daily, Nov. 27, 2012).
During an October presentation to financial analysts, Wuori talked about how shippers are fickle when basis differentials collapse. He allowed that numerous crude rail terminaling projects have been announced or completed. But when basis collapses — or a cheaper transport alternative emerges — capacity goes unused.
“Differentials have to remain high and be seen to be remaining high in order for rail to continue to be viable,” he said. “No one is building new track. You hear a lot about loading facilities and unloading facilities and rail cars being welded together, but nobody’s building much for new track…” he said (see Shale Daily, Oct. 5).
Separately on Wednesday during an earnings conference call. Kinder Morgan Inc. CEO Rich Kinder was asked about his company’s options for capturing Permian Basin price differentials with rail transport.
In response he said in part, “Crude by rail is important…I believe that is going to be part of producers’ long-term portfolio because they’re going to want some optionality…I think it will be a relatively small part because moving crude by rail is more expensive than moving it by pipeline, certainly, and as pipeline capacity gets built, that will take up the lion’s share. But I think you’ll see a lot of savvy producers who’ll want to save back, who knows, 10%, 15%, 20% of their production in a given field to use rail transportation.”
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