Volumes on Enbridge Energy Partners' North Dakota crude pipeline system are on the rise in connection with less competitive netbacks for sending Bakken Shale crude by rail, the company said Tuesday.
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We "expect improvement on our North Dakota system as a result of significant narrowing of pricing differentials between the market centers and the North Dakota supply basin," President Mark Maki said on a call to discuss the company's second-quarter earnings.
Crude-by-rail movements have increased in recent years in North America because of a lag in pipeline capacity to ship booming low-cost shale oil production, notably from the Bakken, to destination markets.
In Q2, volumes on EEP's North Dakota system were 151,000 b/d, compared with 128,000 b/d in the first quarter, Enbridge said. In Q2 2012, system volumes were 219,000 b/d, EEP said.
"The quarterly numbers show a modest improvement from Q1 to Q2, but that actually is [a part of] a much more dramatic story, where the volumes sank in April and rose very dramatically in June and July, and it looks like [they will also do so] in August," Enbridge Inc. President of Liquids Pipelines Steve Wuori said on the call. Enbridge Inc. is EEP's general partner.
At the same time, North Dakota Pipeline Authority data shows rail shipments out of the Bakken may be trending downward. In May, 69% of the crude produced in the Bakken was shipped on a railcar, with 23% on pipeline, according to the most recent information released this month by the agency. In April, 75% moved on rail and 17% on pipelines, it said.
Volumes on the EEP's North Dakota system have grown as Bakken's differential to Gulf Coast benchmark Louisiana Light Sweet have tightened, Wuori said.
Bakken crude was valued at around $7/b below the price of LLS "back a couple of weeks ago," he said. "Basically, when you have diffs in the single digits, or low double digits, rail doesn't work very well... the days of the $15, $20 and $25 differentials appear to have gone away, at least for now."
Those price differentials are tied to the benchmark price spread between Brent and West Texas Intermediate, which has narrowed in recent months.
The Brent/WTI spread was mostly above $20/b from February 4 until March 6, dipping on March 1 to $19.81/b before again rising. The wide spread provided large margins for barging or railing low cost crudes to coastal markets. But the spread has narrowed since March 7. On Tuesday, it was near $3.87/b. On July 19, in fact, the spread inverted, with WTI trading at a premium to Brent for the first time in two years.
A wide Brent/WTI spread, which is a key indicator of netbacks for moving crude around the US, allowed for healthy netbacks for the crude-by-rail shipments.
"With the differentials coming in, I absolutely expect that those volumes will return to pipe, as much pipe that is available," Wuori said.
In Q2 2013, EEP's Bakken pipeline system was at about 40% utilization rate up from about 30% in the previous quarter, Tudor Pickering Holt analysts said in a note Tuesday.
The "pipe utilization bump shows producers clearly responding to narrowing differentials," the analysts said, adding that more than 500,000 b/d is now moving out of the Bakken on pipeline.
But the analysts see Bakken rail economics becoming viable again with "imports/inventories continuing to pressure WTI," they said.
Even now, some destination markets still possess relatively attractive margins for sending crude by rail, including Philadelphia, St. James, Louisiana, and Washington state, Wuori said.
"Rail has been doing a great job of taking [additional Bakken production] away" that has outpaced regional pipeline capacity, Wuori said.
Bakken production in North Dakota is expected to be about 854,292 b/d for July, and reaching about 985,309 b/d in January 2014, according to Bentek data released earlier this month. Bentek is a unit of Platts.
Aside from the volumes flowing through EEP's North Dakota system, Bridger Pipeline moves about 50,000-60,000 b/d of Bakken crude through its Butte Pipeline, Wuori said.
As Bakken production further outpaces capacity, projects like Enbridge's Sandpiper Project becomes "extremely important," Wuori said.
The project, which calls for a new 225,000-375,000 b/d line from Beaver Lodge, North Dakota, to Superior, Wisconsin, is a part of EEP's Light Oil Market Access program. The program will deliver additional crude volumes from North Dakota and western Canada to refineries in the US Midwest, and the Canadian provinces of Ontario and Quebec, the company has said.
In March, the US Federal Energy Regulatory Commission rejected proposed rates for the project, saying the company has not provided enough information to support its proposal.
Enbridge will reapply for the rate approval, but is working through the right approach, Wuori said Tuesday.
The Sandpiper project has an in-service date in early 2016.
During Q2, EEP's net income was $89.9 million (18 cents/unit) compared to a net income of $124.6 million (33 cents/unit) in the year ago period, the company said in an earnings statement.
"Lower than forecasted deliveries on our liquids pipelines systems due to significant unplanned downstream refinery maintenance, in addition to weak NGL prices and associated Midcontinent ethane rejection impacted our performance in the second quarter," Maki said in the statement, adding that the deliveries are expected to increase.