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U.S. oil refiners look abroad for crude supplies as North Dakota boom fades

NEW YORK – PBF Energy Inc, one of the largest independent oil refiners in the United States, spent heavily in recent years to build the rail terminals at its Delaware City complex that it needed to take delivery of large loads of crude coming from North Dakota’s Bakken oil fields.

But now it is considering eliminating those deliveries altogether, and replacing them with foreign crude imports, according to two sources familiar with the situation. It has even closed its small Oklahoma City office that was only opened in 2013 and had served as a hub for the company’s trading in North Dakota’s oil, the sources said.

The sudden lack of interest in Bakken crude by PBF, which is run by Thomas O’Malley, one of the biggest names in the U.S. oil refining industry, reflects a dramatic recent change in the way East Coast refineries are sourcing the crude that they turn into everything from gasoline to heating oil and jet fuel.

The boom in the output of oil from North Dakota’s shale has ebbed as producers have begun to cut back in the face of the plunge in prices by nearly 60 percent since the summer of 2014.

North Dakota’s Bakken production peaked at 1.153 million barrels per day in June, and had fallen to 1.13 million barrels per day by August, according to state data.

The supply restraint has made Bakken crude relatively more expensive after transport costs than oil shipped from Latin America, the Middle East and Africa, prompting East Coast refiners to return to a foreign crude diet they derided as unprofitable five years ago.

Three companies that resuscitated failing oil refineries on the East Coast less than five years ago with the promise of cheap domestic oil are now looking overseas instead, four sources familiar with the plans told Reuters.

Together, PBF, Philadelphia Energy Solutions Inc and Delta Airline’s Monroe Energy are expected to cut their Bakken crude intake to the lowest levels since 2013, according to two oil traders who are familiar with East Coast rail arrangements.

PES, which bought a 335,000 barrel-a-day Philadelphia refinery that was slated for closure in 2012, has slashed its Bakken deliveries to just 17 trains in November from a peak of 100 trains a month during the summer, according to two sources familiar with the plant’s operations.

The planned deliveries mark the lowest monthly volume since the company built a new rail terminal to take advantage of the Bakken revolution. EIA data shows PES imported more than double the amount between January and July, with cargoes from Nigeria, Chad and Azerbaijan.

Related: No more Bakken crude: Canada’s largest refinery heads overseas for supply

LOCKED INTO PAYING

The price of Bakken hasn’t fallen as much as other oil, nearly wiping out the entire $6 a barrel discount to the U.S. benchmark that it traded at in January and sending refiners scrambling for other sources. Meanwhile, a glut of other crudes has made importing – including transport costs of $2 to $3 a barrel – much more attractive.

Because bringing crude by rail from North Dakota to an East Coast refinery usually costs about $10 to $11 a barrel, without a deep discount for the oil, moving it across the country becomes unprofitable. As a result, Bakken crude is used in the U.S. Midwest and Canada where lower transportation costs make it a profitable option.

East Coast refineries accounted for about 10 percent of nationwide imports of crude in July, according to the latest data from the U.S. Energy Information Administration. That is expected to rise as the Bakken shipments fall further, analysts and traders say.

PBF had poured over $50 million into upgrading its Delaware City rail terminal and signed long-term volume commitments to unload at least 85,000 barrels per day from trains at a fixed $2 a barrel cost, regardless of whether it takes the oil. As a result, the company is locked into paying $170,000 a day.

In a conference call late last week, PBF disclosed that it is only budgeting to take 25,000 barrels a day of Bakken oil delivered by rail at its East Coast refineries in 2016.

The company’s spokesman Michael Karlovich said in an email that the company was transferring its single employee in the Oklahoma office to its headquarters in New Jersey, but declined to provide additional detail about the company’s Bakken strategy.

PBF’s Delaware City refinery imported about twice as much crude in July as in January, bringing in cargoes from Colombia and Peru, according to data from the U.S. Energy Information Administration. The company’s Paulsboro, New Jersey, refinery increased its imports by 50 percent in the same period.

PES declined to comment on the shifting crude slate, while Monroe Energy did not respond to requests for comment.

The refiners had previously found that relying on crude from the likes of Colombia, Mexico and Saudi Arabia was unprofitable. But now it may be different provided Bakken crude remains relatively expensive and the U.S. economy doesn’t head into a downturn.

That’s because the refiners are buoyed by increased U.S. fuel demand, partly because of the low oil prices. In 2010, demand was shrinking.

Additionally, they are supported by the closure of underperforming refineries in the Atlantic Basin during the last downturn. And then there is the current availability of deeply discounted crude oil from overseas.

“They are looking for the lowest cost supplies,” said Sandy Fielden, an analyst with RBN Energy. “A few years ago, that was North Dakota, but not today.”

(Reporting By Jarrett Renshaw and Catherine Ngai; Editing by Jessica Resnick-Ault and Martin Howell)

64 comments

  1. Maybe they don’t want any part in the next Bakken oil train explosion, that could kill hundreds, or thousands, in the heavily populated east.

    • Ron try reading the article– it is transportation price– and if the west to east pipeline was finished and operational gtransportion cost AND safety problems would be solved—

    • The article says nothing about a pipeline. The problem is that Bakken used to be priced at WTI minus 6. That discount is gone, so imported crude looks more attractive. Bakken price will have to fall to attract more customers.

    • The article does say it is the difference in transportation cost.
      The pipeline west to east tying in to existing pipeline system in Illinois would correct the transportation cost differtence
      Paul earlier you stated the transportation cost was the reason Canada has sourced crude from OPEC–

    • Rail transportation is $10-11/b vs $2-3/b for marine freight. All else being equal, a refiner will choose a waterborne import. But Bakken had been discounted $6/b vs WTI, making the choice to run Bakken easier to make. Now, the discount is gone. The discounting must return or some Bakken wells will have to be shut in.

    • Paul Smith –why not Eagleford light tankered out of Corpus Christi Tx

    • Good question. My guess is that Jones Act tanker rates are too high compared to foreign import alternatives.

  2. The difference is in transportation cost– seems the west to east pipeline is late

    • The real problem is Bakken used to be priced at WTI minus 6. That discount is gone now, making imported crude more attractive. Bakken price will have to fall to get more customers.

    • So the man who wrote the article and the refining company statement is Bull-?
      did you read the article-?

    • I read the article. Did you? Here’s what you missed: “The price of Bakken hasn’t fallen as much as other oil, nearly wiping out the entire $6 a barrel discount to the U.S. benchmark that it traded at in January and sending refiners scrambling for other sources. Meanwhile, a glut of other crudes has made importing – including transport costs of $2 to $3 a barrel – much more attractive.”

    • –Same article–
      “The supply restraint has made Bakken crude relatively more expensive after transport costs than oil shipped from Latin America, the Middle East and Africa,”
      ” Because bringing crude by rail from North Dakota to an East Coast refinery usually costs about $10 to $11 a barrel, without a deep discount for the oil, moving it across the country becomes unprofitable.”

    • Thad you make my point. Leave ND oil in ND.

    • Wayne Stubson – Fantastic idea so state domestic needs are met what do you do with the balance

    • Thad, do you know what the Bakken “supply restraint” is? It’s the lack of economic transportation for halfway across the country. No applicable pipeline has been built and rail freight is too expensive. Hence the $6/b discount that will have to return.

    • My original comment in this thread that you took issue with-remember-?
      “The difference is in transportation cost– seems the west to east pipeline is late”
      You are aware that there is a pipeline in progress-?

    • To Illinois not all the way to the East Coast. Unless the $6/b discount is restored, Bakken crude demand will decline.

    • There are pipelines from Illinois to the east coast

    • No, Thad, there are no crude pipelines to East Coast refineries. Those refineries run waterborne imports or shale by rail. The latter has become too expensive because Bakken discount has disappeared.

    • Still, Patoka IL is a major crude supply hub and will enable Bakken much greater access to all Midwest refineries.

  3. So buy from the terrorists wow

  4. We should send our money to other countries… makes sense lol

  5. Yep Washington’s delays on our nation’s need for energy independence will be seen as a major failure by.anyone with a brain.

    • If you are referring to the K-XL first read the article Then note the K-XL would run north to south and would not carry the Bakken light cude.. The pipeline needed would run west to east and tie-in to the existing pipeline system in Illinois

    • No Thad Daly, my comment was more to the obvious bias the current administration has to anything oil related and thus makes any and all pipeline work much more difficult than it has to be in an effort to impede anything that it disagrees with.

      And the Canadian tar sands oil is so think that it won’t flow down the the pipeline without mixing it with other crude…. Of a lighter variety…. And much of the oil we haul here in the bakken goes up to Canada to be mixed with the oil sands to make transporting of their crude viable.

      So I would find it hard to believe they wouldn’t be increasing their use of bakken crude if this pipeline was approved.

    • Money moron. Has nothong to do with politics. The ragheads knew all they had to do was out produce and unsell expensive tight shale oil to shut it down.

    • What I fail to understand is why some think the importation of tar crude will increase as US consumption of oil is decreasing and production increases.
      And I can find no reference to canada importing Bakken light to dilute Alberta tar

    • No, Thad, US crude production has declined 500,000 bpd since June. That means imports will increase to compensate for shale well depletion. From where do you want the imports to come, Canada or OPEC?

    • Thad – I work directly with guys here in the bakken that haul crude from north dakota over to canada for just that purpose. But I dont know that its newsworthy. I talk to pipeline engineers on pipeline site and the pipeline company that shared our large industrial yard for the 9 months I worked for another company. All.of them were pretty clear.

      I’m not sure what references you are seeking, but I don’t know that there would be any as I’m finding a lot of the news about the bakken to be barely comparable, let alone accurate, to what is actually going on here for the most part.

    • And Randy, thank for your childish name calling, but here (kicks ball) go play with this red ball, adults are talking.

    • it is not depletetion it is the cheaper cost of imported oil– there are thousands of DUC wells –all they need is fracking and completetion
      And the east cost refineries are not importing the Canada tar crude

    • But to clarify again thad… I refer to the nation’s current leadership, and it’s clear willingness to manipulate the government to push their own agenda for whatever legacy they hope to build. Its change for change’s sake. And it hurts the American people. So this is just a stark indicator of how it makes anything advancing oil and gas difficult because they know if gas is cheap, people will use it and the green initiative will lose steam.

    • Randy Sokolofsky –Moron-? LOL Money is politics – you have no idea.. OPEC countries are starting to de-stabilizes as they lose money—

    • That is true thad. It is that the saudis can go into way more massive debt than the American oil companies whom must turn a profit, or risk their share price tanking during a massive sell off. That is why this tactic is so clearly market manipulation. They are offering deep discounts to keep or even gain market share. And we can’t compete when can’t play on the same, or at least similar level playing field.

    • No, Thad, DUC wells won’t be completed until prices are higher, perhaps the $65/b you keep mentioning. Depletion is very much in play for currently producing wells. That’s what depletion applies to. The decline of 500,000 bpd since June is almost all shale-depletion.

    • Rena it is bitumen tar aka asphalt – tar sands is the proper nomenclature- same as the La Brea tar pit at LA and tar sands in Kern County

  6. We would rather buy foreign oil than American oil? What the heck…

  7. Fades?the boom was shut off like a light switch. This us such a joke.

  8. And we want to export. Righttttt!!

  9. North Dakota should build our own refineries and eliminate a lot of transportation costs. Much safer too!!!

  10. So much for USA energy independence.

    • Unfortunatly, the choices were made a long time ago that made that extremely hard to do now. We have poured trillions of dollars into those fat cats pockets over many decades. Now they can simply dump massive amounts super cheap oil into the market. Thus starving out our domestic companies. The only real way to change this is to stop importing. That is very unlikely because the price at the pumps will go through the roof.

    • I have often wondered why the U.S. could not simply have some sort of import fee. I’ll just use $60 as the price of oil entering the U.S.. If OPEC wants to sell oil for $40 then a $20 fee would be imposed on all oil entering the U.S.. This type of number would set a reasonable floor for domestic producers and gas prices would/ should be about $3. I think we would at least provide some stability and if US producers over produce our market then they would need to cut back U.S. if they wanted to maintain the $60 price.

    • Because global commodities don’t work like that.

  11. No worries, windmills and solar panels and unicorn farts are going to supply all our energy needs now

  12. Could try looking, north? I think there’s crude there.

  13. Good new oil is going to rebound in next 3 years

  14. When the price of importing oil go back up and it will American Oil production will go back up , the oils still there!

  15. Such bologana we have so much oil here in the United States it’s the damn government sending everything over seas and putting regulations on oil and then they tell you oh we are running out of oil all bologana