With the oil market still awash with bounties of cheap crude oil, one buyer is asking producers to pay them to take shipments of a particular low-grade Bakken crude, reports Bloomberg.
On Friday Koch Industries’ refining branch Flint Hills Resources offered a list price of -$0.50 a barrel for high-sulfur North Dakota Sour crude blends. One year ago that price was $13.50, and in January 2014 it was $47.60, according to Bloomberg.
Low grade crudes such as the high-sulfur North Dakota Sour are priced differently than their higher quality counterparts to compensate for poor quality and transport costs. The negative price offered by Flint Resources can mostly be attributed to inadequate pipeline infrastructure, and capacity, for low quality blends. In 2011 Enbridge actually stopped allowing high-sulfur crudes in its North Dakota pipelines.
The president of a Houston-based oil consulting firm told Bloomberg, “Telling producers that they have to pay you to take away their oil certainly gives the producers a whole bunch of incentive to shut in their wells.” The vice president of a Texas-based petroleum consulting company said, “You don’t produce stuff that’s a negative number. You shut in the well.”
Although the high sulfur blend of North Dakota crude only accounts for less than 5 percent of daily production levels in North Dakota, it illustrates the acute pain oilfields are experiencing. On Monday oil prices dipped below $28 per barrel on anticipation of Iran sanctions being lifted and the country’s intent to increase production by 500,000 barrels per day. Securities analyst Bart Melek told Reuters, “You can’t say this was unexpected but the Iran news is an additional factor that’s working against oil prices.”
Bloomberg notes that negative prices might be rare, but they are not unprecedented. Last year in oil-rich Alberta, propane traded in the negative as well. The negative price for North Dakota Sour might be an extreme case, but other low quality blends are faced with similar price routs. For example, Plains All American has set low benchmark prices for South Texas Sour at $13.25 per barrel and Oklahoma Sour at $13.50. Additionally, Canadian Bitumen dropped to $8.35 last week compared to the $80 prices seen about two years ago.