What will get North Dakota drivers back on the road?
On Monday, the US Department of Transportation released its July 2015 Traffic Volume Trends, showing every state posting a year-over-year increase in vehicle miles traveled – except for one.
Ironically, that state is North Dakota, home of the Bakken shale oil formation and arguably one of the main reasons for the US low gasoline prices that have enticed American drivers in other states to take to the road.
Miles traveled on all North Dakota roads declined by only 0.1% to 988 million vehicle miles in July, virtually unchanged from the year earlier. But this compared with the year-over-year 4.2% increase in total vehicle miles traveled to 283.7 billion vehicle miles traveled for the whole country.
Traffic on North Dakota’s urban arterial roads fell year on year by 1.5% to 173 million vehicle miles in July, compared with 3.9% increase to 144 billion vehicle miles for the rest of the country. North Dakota’s arterial roads saw a 0.6% decline in miles traveled to 512 million vehicle miles traveled in July 2015 compared with July 2014.
The falloff in North Dakota travel corresponds with the low price Williston Basin producers get for their oil and the high cost associated with producing shale oil, which has burst the economic boom the state has experienced over the past 5 years or so.
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Drillers in North Dakota continue to pack up shop, often leaving DUCS – wells drilled but uncompleted – in their wake. So far in September, rotary rigs drilling for oil and gas in North Dakota averaged 69, according to Baker Hughes, compared with the 187 rigs operating last September.
North Dakota oil production has started to fall from record highs as rigs stop, with July production estimated at 1.2 million b/d after touching a record high of 1.211 million b/d in June, according to the North Dakota Pipeline Authority.
All global oil prices have been dropped precipitously, forcing most producers to cut back output. West Texas Intermediate front-month futures closed at $44.43/b on Monday on the NYMEX, compared with the $94.57/b close on September 29, 2014.
The Bakken’s discount to US cash benchmark West Texas Intermediate narrowed to average $4.23/b for August 2015 compared with the $7.02/b average discount in August 2014, Platts assessment data shows. This is not even enough to cover the rail cost of between $12-$14 to ship a spot barrel to East Coast refineries, where once “price-advantaged” Bakken played a key role keeping the process units running and refinery doors open.
East Coast refiners, such as Phillips 66 and PBF, have contracts with producers to rail Bakken to their unloading terminals at the 238,000 b/d Bayway refinery in Linden, New Jersey, and 182,200 b/d Delaware City, Delaware, plant, respectively, meaning they pay less than the spot price and less than the $14/b shipment costs.
But neither can they be making much money either, processing Bakken.
The Bakken cracking netback margin on US Atlantic Coast averaged $4.31/b in August, according to Platts margin data, which reflects the difference between a crude’s netback and its spot price. Netbacks are based on crude yields, which are calculated by applying Platts product price assessments to yield formulas designed by Turner, Mason & Co. This compares with a cracking netback margin of $11.15/b an East Coast refiner earns by importing and running Cabinda crude from Angola.
What will get North Dakota’s drivers back on the road, particularly those driving trucks of oil to Canadian pipelines and rail terminals for shipment to refineries?
Basically, less supply and more demand raising the price of oil to make Bakken drilling more attractive.
The US Energy Information Administration forecasts in its most recent Short Term Energy Outlook that lower 48 production, excluding federal Gulf of Mexico output, will drop by about 30,000 b/d to average 7.19 million b/d in the third quarter of 2015, and decline further to average of 6.9 million b/d in Q4 while pumping up demand estimates to average 19.6 million b/d in both Q3 and Q4 from the 19.25 b/d averaged in Q2.
And already in the third quarter, the EIA undershot its price forecast, expecting the cash spot price of West Texas Intermediate to average $45.75 in the quarter. Platts assessment data shows the price has averaged $46.59/b so far.
This appears doable for Bakken producers, who have cut costs to live in the world of cheaper oil.
“We are tooling Whiting to run and grow at $40 to $50 oil,” CEO James Volker said of his company, one of the largest Bakken operators.