Tight oil transportation looms large for producers, experts say

US tight oil producers already face challenges in economically getting their high-quality crude to refineries, and transportation logistics will need to be addressed more fully as production grows, experts at an Apr. 3 Washington conference agreed.

Some Bakken shale producers already ship their crude by rail to Louisiana to get a price closer to North Sea Brent than to West Texas Intermediate, Hill Vaden, a senior US upstream research analyst at Wood Mackenzie Ltd., told the conference cosponsored by the US Association for Energy Economics National Capital Area Chapter and the Center for Strategic and International Studies.

Others seek markets for associated natural gas and gas liquids. “There needs to be more coordination of upstream and midstream activities,” said Tyler Van Leeuwen, project manager at Advanced Resources International Inc. in Arlington, Va. “You can fly over the Nio Brara at night and see the landscape below lit by gas being flared.”

US tight oil resources are concentrated in the upper Great Plains, well away from most refineries, noted Matt Marshall, energy analysis manager at Bentek Energy in Evergreen, Colo. Gulf Coast refineries can’t take all the crude that will be produced, while East and West Coast plants configured to process higher grades are looking for ways to receive it, he said.

Canadian producers of crude from Alberta’s oil sands consider the US their most logical market, Marshall continued. “Every barrel produced in Canada wants to come to the US,” he said. Pipelines are being built in addition to TransCanada Corp.’s Keystone XL project, he added.

Possible impediment

Transportation hurdles potentially could slow down tight oil development, warned Sarah A. Emerson, president of Energy Security Analysis Inc. in Wakefield, Mass. “When I look at supplies through the lens of markets and pricing, it’s a little less promising,” she said.

She explained that many factors are involved, including US shale liquids’ relationship to Canadian oil sands, declining production of conventional Canadian crude, US heavy oil processing capacity, and a reversal of a pipeline between Sarnia, Ont., and Montreal. Implications include a likely continued US reduction in non-Canadian imports, and Gulf Coast sour crude refining capacity likely encouraging US tight oil exports to Latin America, Emerson said.

Pipeline system development lags drilling for gas and NGLs as well as crude for several reasons, according to Donald F. Santa, president of the Interstate Natural Gas Association of America. Wells are widely scattered, weather can pose construction challenges, existing transmission systems are designed for lower volumes, and time is need to design, permit, and build new capacity, he explained.

Oil pipeline developers also must obtain rights-of-way in each state, unlike gas pipeline project sponsors that can get eminent domain through the Federal Energy Regulatory Commission, Santa said. “Not all of these areas are equal,” he added. “That can affect how infrastructure investments pay out. Commodity pricing also has determined where investment has gone.”

Crack spreads vary

Marshall said that refining crack spreads in the Midwest are significantly better than elsewhere in the US. That explains why ConocoPhillips is running its plants there at full capacity as it closes refineries elsewhere, he said. “There’s a possibility that growing light crude production in the Midwest could revive refining on the East Coast,” Marshall said.

Emerson said such a revival would be limited if it materialized. “It’s not clear we need all those East Coast refineries,” she maintained. “If you look at world gasoline supplies and startups of export refineries, supplies are ample. Maybe one of these East Coast refineries could reopen, but I don’t see a widespread revival.”

There’s already been at least one tight oil shipment by rail from the Bakken shale to Albany, NY, where the crude was transferred to barges and transported to a Philadelphia area refinery, according to Marshall.

“There also have been rumblings about building a pipeline from Canton, Ohio, to the East Coast for future production from the Utica shale,” he said. “I’ve already heard that some pipeline operators are considering it, notably Enbridge.” Logistics would be simpler than other projects which have been proposed because only two states—Ohio and Pennsylvania—would be involved, and both have Republican governors, Marshall observed.

But Santa said constructing any pipeline—oil or gas—to the East Coast can be formidable because it usually involves getting permits through heavily populated areas. “More than one of INGAA’s members has discovered that it’s hardest to get the necessary permits for that last mile of pipeline before final delivery,” he said.

Contact Nick Snow at [email protected].